5 Tips for Negotiating Better Terms With Your Bank
Chris Ozarowski
5 min read
Drazen Zigic / iStock.com
Do you have a large amount of debt you are trying to pay off? In some cases, you may be able to negotiate down your debt so you end up paying less money. With certain types of debt, you may wind up only paying 25% to 50% of your total owed, according to Experian.
However, debt negotiation can be a tricky thing and many so-called debt negotiation or consolidation companies out there have a history of charging customers large fees without actually helping them get out of debt, so you have to be careful. Here are a few tips and best practices you can use when negotiating with your bank and other creditors.
Before you end up negotiating with your bank or creditors, you need to figure out exactly what your current situation is. Sit down and write out all of your current debts, such as credit cards, loans or car payments.
See whether you would be able to pay these debts off with your current income if you budgeted your expenses. Some debt settlement strategies can have a long-lasting effect on your credit, so you need to consider the risks before making any sudden decisions.
See what part of your debt is secured versus unsecured. Secured debt is like a car loan or mortgage, where the creditor can come and repossess your vehicle or car if you don’t make your payments, according to Nolo.com. These debts are harder to negotiate, since the creditor may be able to get their money back by repossessing and then selling your home or vehicle.
Unsecured debt, on the other hand, can be easier to negotiate. The only way your bank has to force you to pay is to sue you and then put a lien on your property or garnish your wages, as further explained by Nolo.com. This is something many banks choose not to do. Instead, once you haven’t made any payments for a while, they sell your debt to a collections agency for a fraction of its value, according to Equifax.
The collections agency will often be the one who will take you to court over the debt. However, since collections agencies buy debt at a discount, your bank may be willing to negotiate a lower payment with you before selling your debt. If your debt is already with a collections agency, the agency may also be willing to negotiate.
Talk To Your Bank About an Agreement
If you have a large amount of credit card debt and you aren’t able to make payments, you should contact your bank to ask about a hardship agreement or workout agreement. Since credit card debt is unsecured, banks may be willing to negotiate with you instead of risking you going into bankruptcy or other situations where they won’t get any of their money back.
A hardship agreement is designed to temporarily reduce or suspend your payments during periods of financial difficulty, such as losing your job. A workout agreement might involve adjusting the terms of your debt to make it more manageable. This could include lowering the interest rate, waiving certain fees, extending the loan period or even reducing the principal amount owed. You may need to provide the bank with documentation that proves your current situation.
Try To Get a Lump Sum Settlement
Once you have enough saved up that you could pay off at least half of one of your loans or credit cards, you can contact your bank or creditor and try to negotiate for a lump sum settlement.
Be upfront about your financial difficulties and the amount you can realistically afford to pay. You can send a formal document to your bank to indicate to it that you want to settle for a lump sum. It’s often best to start with a lower offer, such as 25% to 30% of your debt, giving you some room to negotiate upward if necessary, according to Experian.
A lump sum settlement can be a win-win situation. For your bank, accepting a lump sum provides the certainty of recovering a portion of the debt without the ongoing costs and efforts associated with collection. For you, it means potentially reducing your total debt significantly, ending collections activities and starting the process of repairing your financial situation.
If your creditor agrees to a lump sum settlement, ensure you get the agreement in writing before making any payment. This document should detail the amount to be paid, the terms of the settlement and the fact that the payment settles the debt in full.
Check Any Debt Negotiation Companies With Your State Attorney
If this seems like something hard to do by yourself, you may be tempted to work with a debt settlement company. However, you should always do your homework before you engage with a debt negotiation or settlement company. Many companies offer to negotiate your debts for you, but they can charge hefty fees and may not work toward helping you.
Check their reputation by contacting your state attorney general’s office or local consumer protection agency. If your state requires licensing for a debt settlement company, then make sure that it is licensed to operate there and has no significant complaints filed against it. This way, you can protect yourself from scams and check that the company has a record of legitimately helping people reduce their debts.
