Payment Plan

Payment plan summary:

• A payment plan makes changes to the standard debt repayment agreement you have with your lender. 

• With a payment plan, the lender agrees to modify your standard agreement to make monthly payments more affordable. 

• Lenders don’t need to agree to a payment plan, but may do so if they fear you’ll go into default. 

Payment Plan Definition and Meaning

A payment plan is an altered repayment agreement you negotiate with your creditors if you're struggling to pay your debts according to the existing repayment conditions. It could involve a longer repayment term, a lower interest rate, or deferred payments.

When you’re facing financial hardship, your creditors may be willing to negotiate a new payment plan so you can get back on track. Creditors want to maximize their chances of being paid as much as possible. At the same time, they want to minimize the possibility of putting you into collections. 

If a creditor thinks you may not be able to pay, they may be willing to allow you to enter into a payment plan. 

More About Payment Plan 

If you’re struggling to pay your bills, you could ask your creditors about a payment plan before you default on your debt. Taking proactive action could help you avoid added fees and protect your credit as much as possible.

Asking creditors to put you on a payment plan could be the simplest option if you're facing short-term financial hardship. This could be a good strategy if you expect to be able to resume full payments soon or think you’ll be able to repay the full amount. You could negotiate for a temporarily lower amount before you go back to regular payments when the hardship passes.

Your credit card company doesn’t have to agree to a payment plan, but may do so if they think you’re at risk of defaulting without a change in terms. The payment plan should result in lower monthly payments. Your creditor could lower your interest rate, reduce your balance, or give you more time to repay when you enter into a payment plan.

Payment plans typically don’t reduce your balance. You still have to pay the entire amount you owe. The new plan just makes it more affordable for you to work towards paying off your debt each month. Depending on your payment plan, it could actually make total borrowing costs more expensive over time if you pay interest for longer.

You should be prepared to explain to your creditors why you can’t pay the minimum amount due, as well as the amount you can afford to pay each month. If you expect to restart your normal payments soon, you can provide those details as well. Last, specify a new payment you’re requesting that fits in your budget. 

Here’s a closer look at how different payment plans work. 

Types of Payment Plans

Payment plans come in several varieties. 

The most common is when you negotiate directly with your creditors for a short-term deferment, reduced interest rate, or longer repayment term.

A debt management plan is another type. In this strategy, a credit counselor at a nonprofit credit counseling company works to negotiate an arrangement with your creditors that makes it easier for you to repay your full outstanding balance. The credit counselor collects the monthly payment, then distributes it to creditors based on the agreement in place.

Debt settlement could be another option. You—or a professional debt settlement company—negotiate with your creditors with the goal of reducing the amount you owe to get rid of your debt for less. Creditors are typically more willing to negotiate with you if they know that you’re having a financial hardship that makes it difficult or impossible to repay the full balance. 

The right type of payment plan will depend on the amount of debt you have and the money you have available to devote to debt payoff.