Different Types of Loan Payment Plans Explained
NEW YORK, March 6, 2023 (Newswire.com) - iQuanti: For anyone trying to figure out how loan payments work, determining the most affordable payment plan can be overwhelming. Luckily, there are a number of loan payment options available to fit nearly any budget.
It can be helpful to use a loan payment calculator to get an accurate estimate of what your loan payments would look like under each plan. Take your loan balance and annual interest rate into consideration when making your selection so you can make the best choice for your financial situation.
In this article, we'll explain five different types of loan payment plans and when to apply for them.
1. Deferments and forbearance
Borrowers who struggle to make monthly installment payments do have alternative options for repayment. One is to ask for a deferment, which takes the next payment and moves it to the end of the loan term, essentially giving you a month off. Another is forbearance, which is a request to freeze payments due to financial difficulties.
2. Extended Payment Plan
Some lenders offer extended repayments for borrowers with over a certain amount in total debt. The extension simply stretches the term of the loan by a certain number of years. For instance, a five-year loan where you're paying $300 a month could be extended out to ten years, cutting that monthly payment in half. This is also known as loan refinancing.
3. Graduated Payment Plan
This type of payment plan is designed for borrowers in lower income brackets who expect to make more as they progress through their career path. Graduated payments are common in the student loan sector, where new graduates take entry-level jobs at companies they can grow with. Lenders know their income will go up, so they're willing to work with them.
4. Income-Based Payment Plan
Income-based payment plans are exactly what they sound like. The amount of your monthly installment payment is based on your income. Unlike graduated payments, income-based payments are capped at a certain percentage of discretionary income, so the number could go up or down each month, depending on your financial circumstances.
5. Pay-As-Your-Earn Plan (PAYE)
PAYE plans are the big brother of income-based plans. The cap percentage is lower, and interest is limited to 10% of the principal amount owed. You generally won't see this with traditional loans, but students should investigate it. Most student loan lenders offer PAYE or income-based payment plans for student loan borrowers.
The Bottom Line
Missed payments on an installment loan can have a negative impact on your credit score and affect your ability to borrow in the future. Some of the options we've listed here may not be available from your lender. If they are, you may not see them advertised. Ask your lender about deferments and forbearance. Extended payment plans, graduated payment plans, income-based payment plans, and PAYE plans can also provide financial relief when you need it.
Whether you're paying off a personal loan, student loan, or consolidation loan, it's important to research alternative payment options when it looks like you're falling behind. Don't wait until you've already missed a payment.Contact Information:
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Original Source: Different Types of Loan Payment Plans Explained