Loan Rehabilitation to Improve Credit Score: Fact or Fiction?

What is Loan Rehabilitation?

Loan rehabilitation allows you to improve your credit score by changing the status of your loans. The only types of loans that are eligible for rehabilitation include federal loans. Examples include Federal Perkins loans, Health Professions Student Loans, Federal Stafford Loans, and more. Someone will rehabilitate their loan after it has been defaulted, which means the person hasn’t made a payment in 270 days or more.

What are the impacts of a defaulted loan?

Wage garnishment – Wage garnishment can occur after you have defaulted on your loans. It involves taking a portion of your pay check before you receive it. This action ensures that some of your work money will go towards the debt that you owe.

Poor credit score – Because you will have a loan in “default” status on your credit report, your credit score will be negatively impacted.

How does the loan rehabilitation process work?

If you are thinking about going through the loan rehabilitation process, the first step is to contact your loan lender. The National Student Loan Data System provides people who don’t know who their loan lender is with a comprehensive database of federal loan lenders. After you have negotiated an agreement with the lender, you will probably be required to make nine payments during a 10 month long duration. This means that you can miss one month’s payment and still have the ability to rehabilitate a loan. After this process has been completed, you will no longer have a “default” status on your credit report.

What are the benefits of completing the loan rehabilitation process?

Improved credit history – The biggest benefit of loan rehabilitation is probably that it gives you the ability to improve your credit history and/or score. This is important because lenders who offer personal loans look at your credit history in order to gauge the risk associated with giving you a loan. If they think you are a high risk, they will only offer loans that have high interest rates. In the worst case scenarios, you are unable to obtain a loan at all. This could be especially important for people who plan on making big purchases, such as an automobile or home.

New student loans – After you have completed the loan rehabilitation process; you will be eligible to apply for new loans and grants. This could be especially important for graduate students who need additional funding for their education, but defaulted on their federal undergraduate student loans.

Freedom – Knowing that you are improving your financial situation will give you additional freedom. You won’t have to worry about the debt collectors, missing payments, or having a poor credit score.

What are some of the other important factors to consider?

You only get one chance – An important factor to consider before you apply for loan rehabilitation is that you will only get one chance. If you are not ready to rehabilitate your loan or do not have the financial capability, you should wait.

In conclusion, loan rehabilitation can improve your financial situation and make you eligible for new loans and grants. Because you only have one chance to rehabilitate your loan, you should always make sure that you will have the financial capability to make 9 payments during a 10 month period.

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