Why Loan Workouts are Beneficial to Lenders

A loan workout is any type of payment plan or restructuring that helps a borrower avoid default. Typically, the lender who offers a loan workout plan is settling the debt for less than the borrower owes. This may seem disadvantageous to the lender, but the opposite is often true. When a borrower defaults, the lender will spend resources and time trying to recover the debt. The debt is rarely recovered in full. With a workout, the lender can reduce the resources spent on the loan and be guaranteed at least a partial recovery. 

Examples of Loan Workouts

Any type of loan restructuring may be called a loan workout. For example, a direct refinance with a lender, the reduction of interest rates, a forbearance agreement, or a deferment, is a loan workout. The process is only termed a "loan workout" if the agreement is made directly with the original lender, however. Often, a borrower will approach a new lender to secure a loan and payoff an original debt. While this is a possible solution, it often leaves the lender with little say, a marginalized profit, and reason to charge penalties against the borrower. 

Benefits to the Borrower

By working out the loan, the borrower will often save money and will also save their credit score. For example, some lenders will charge a prepayment fee if a borrower closes the loan by refinancing with a third party. This fee can be in the thousands of dollars, and it substantially adds to the debt the borrower will be assuming with the new lender. Additionally, when a lender does not agree to a workout plan, the lender can mark the borrower's credit. The loan will appear as closed, but it will reflect the debt was closed in a manner unsatisfactory to the lender. This is a red flag to future borrowers, and it can be avoided with a direct loan workout.  

Benefits to the Lender

The lender will often agree to a workout because the lender's main goal is to recover losses. Even if the lender does not profit on a loan, at least recovering the sum that was lent out will resolve the issues in most cases. Typically, a lender would have to send the loan to collections, paying the collection agent a fee, or take the loan to court. This can be very expensive, particularly if the failed loan results in a home foreclosure. In that case, the lender additionally must attempt to sell the asset, losing more money each day it remains on the market. 

Securing a Loan Workout

When you feel you can resolve a debt if given the right options, contact your lender directly. Discuss the reasons why you were unable to meet the loan contract as it was, and propose a new contract that would allow you both to recover the majority of your losses. If your lender denies your application for a refinance or workout option, explain that you will have no choice but to allow the loan to move into default and attempt to resolve it in court. When the lender sees this potential expense, the lender is more likely to work with you.

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