Renegotiated Loan

DEFINITION of 'Renegotiated Loan'

The result of an agreement between a borrower and a lender to modify a loan by taking a loan that a customer was having difficulty paying and turning it into a loan that the customer can pay. The loan may be modified by lowering the interest rate, changing it from an adjustable-rate loan to a fixed-rate loan, lengthening the repayment period or forbearing principal.

A renegotiated loan can benefit both borrowers and lenders. The borrower is able to maintain his or her credit rating, avoid bankruptcy and retain use of the asset that is tied to the loan (e.g., a house). The lender, while it may see less benefit (i.e., less interest income) from a renegotiated loan, retains the customer's business and may have better profits than it would by allowing the borrower to default.

BREAKING DOWN 'Renegotiated Loan'

Renegotiated loans, also called loan modifications, were popular in the aftermath of the 2007 housing-bubble burst among homeowners who found themselves unable to pay their mortgages. A bank will not always agree to renegotiate a loan. Sometimes the bank will see a greater financial benefit from letting the loan default and getting the nonperforming loan off its books than from modifying the loan.

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