What Is a Repayment Plan?

How Does a Repayment Plan Work?

A repayment plan is a structured way to repay a loan over a period of time, often with fixed monthly payments. Repayment plans work differently depending on the type of debt in question.

Personal loans and other types of installment credit automatically include a predetermined repayment plan you agree to when you apply for the debt. These debts have specific loan terms, interest rates and monthly payment amounts that typically won’t change as long as the debt is in repayment.

However, repayment plans can also refer to an optional arrangement you can make with a lender to repay revolving debt, such as credit cards. People typically enter into these types of repayment plans when they’re anticipating difficulty—or are already struggling with—making payments.

Here are a few common examples of repayment plans:

Student Loans

Federal student loans have a standard 10-year repayment term. But there are a number of options for student loan repayment plans that break up your payments differently in order to make them more affordable.

For example, there’s an extended repayment plan that allows you to lower your monthly student loan payments by extending your term to 25 years. There are also income-driven repayment (IDR) plans, which limit your payments based on your income and provide forgiveness on the remaining balance after 20 or 25 years. You can compare federal student loan repayment plan options using the Department of Education’s Repayment Estimator tool.

Private student loans don’t offer the same scope of repayment plan options. They typically come with different repayment term lengths that you agree to when you apply for the loan.

Mortgages

Mortgage repayment plans are a way for borrowers to get back on track if they’ve missed payments or are coming off of a forbearance period. A repayment plan adds a portion of the past-due amount to your bill for a period of several months until you’re caught up.

Mortgage repayment plans can help you avoid foreclosure and get back on top of your payments. That could make them a good option if you can’t afford your mortgage payments due to a temporary financial hardship.

Depending on your credit and current interest rates, refinancing your mortgage can be another option for making your payments more affordable. It’s a good idea to start by finding a housing counselor approved by Housing and Urban Development (HUD) for advice on choosing your best option.

Other Types of Debt

Some creditors offer borrowers alternate ways to repay when they need it. For example, credit card companies may offer you a repayment plan if you’re having a hard time paying off your balance. Also known as credit card hardship programs, these sometimes with the added benefit of a lower rate of interest in exchange for repaying your balance in installments.

And some health care providers offer repayment plans for medical bills that allow you to pay your bill in installments if you aren’t able to pay in full.

Pros and Cons of Repayment Plans

Repayment plans work differently for different types of debt, so the pros and cons will depend on the specific debt and the specific terms of the plan. Broadly speaking, here are some potential benefits and drawbacks of repayment plans to look out for.

Pros of Repayment Plans

• Reduce credit damage: Loan repayment plans in general can help you make payments affordable and reduce the negative impact to your credit of missing payments. In the case of a mortgage repayment plan, it can also help you avoid foreclosure. Even if you have already missed payments, repayment plans can help reduce further credit harm.
• Affordability: Repayment plans are designed to make affording your payments easier. For example, a graduated student loan repayment plan can help you lower your payments when you’re fresh out of school and early in your career, allowing you to pay more when you become more established. An income-driven repayment plan can help you lower your payments based on how much you can afford on your income.
• Potential for debt forgiveness: Some student loan repayment plans offer student loan forgiveness for your remaining balance if you make on-time payments for the agreed amount over the term of the repayment plan.

Cons of Repayment Plans

• Can keep you in debt longer: For example, student loan repayment plans can reduce your loan payment but extend your loan term up to 20 or 25 years—much longer than the standard 10-year repayment period. Similarly, a medical debt repayment plan would mean spreading out your payments over more time in exchange for a lower monthly payment.
• Can be more expensive: If you extend your loan term and lower your monthly payment, you can generally expect to pay more over the life of the loan because interest will accrue over a longer period of time. This could impact you if you apply for an extended student loan repayment plan, such as the graduated repayment plan, for instance.
• Can cause y ou to lose access to credit: In the case of credit cards, hardship programs may grant you a lower interest rate, waived fees and fixed monthly payments, but you may not be able to make any new charges to your credit card.

Is a Repayment Plan the Right Option for You?

Whether a repayment plan is a good option for you comes down to the type of debt you’re carrying, the terms of the repayment plan and your financial situation. Be careful to review the terms and crunch the numbers before you opt in to a repayment plan. Make sure you’ll be able to afford the payments before you agree to the plan. If you won’t be able to, see if the lender has other options available.

The Bottom Line

The benefits of entering into a repayment plan come down to the specific type of debt the plan is attached to. It’s important to understand the terms of a given plan before you consider the agreement. If you’re struggling to pay off debt, it’s a good idea to work with a credit counselor to discuss your options and come up with a plan.

While you’re working on a strategy to make paying off debt more affordable or effective, check your credit report for free through Experian for a snapshot of what exactly you owe. You can also sign up for free credit monitoring to keep an ongoing eye on your credit.