How Does a Re-instated Loan Affect Your Credit?

A re-instated loan renews a debt obligation.

A re-instated loan renews a debt obligation.

Your credit score is serious business. During times of financial difficulty, it is important to make tough decisions wisely and to avoid overextending yourself, making a bad situation worse. Consumers are offered many financial solutions and alternatives to their financial problems, making it hard to know what is right. Ultimately, consumers know the importance of their credit score and want to make sure that a solution they may consider, such as re-instating a loan, will not have an adverse effect.

What is Loan Re-instatement?

Consumers often re-instate loans to prevent losing property that is secured by the loan. In some cases, consumers may opt to re-instate a loan out of loyalty to a lender or out of a personal obligation. When you re-instate a loan, you agree to pay for a debt despite the contract being broken. For example, during bankruptcy proceedings, consumers may decide to re-instate an auto loan so they can keep their car. Additionally, home owners being foreclosed on may opt to re-instate their home loan to keep their house by rectifying the default with the lender.

How Re-instatement Impacts Your Credit

Consumers who re-instate loans generally do so during a time when their credit is already being negatively impacted. If you have filed bankruptcy or you are in foreclosure, your credit has suffered. Re-instating a loan has little immediate impact on your credit. However, over time, you decide how the re-instated loan will affect your credit based on the payment history you establish. Paying on time will report favorably on your report. Re-instating a loan gives you the opportunity to immediately begin rebuilding your credit.

Deciding to Re-instate a Loan

Whether or not you decide to re-instate a loan generally depends on whether or not the debt is secured or unsecured. If you are not losing personal property of value to you, as with a credit card, you may be relieved to no longer have the debt. However, if you cannot afford to lose the property secured by the debt, you may want to re-instate the debt to keep the property. Before deciding to re-instate a debt, evaluate if you can realistically afford to pay it back. You do not want to re-instate a debt that will continue to damage your credit if you can't make the payments in the future.

How to Re-instate a Loan

Re-instating a loan is arranged directly with the lender, unless you have hired someone to negotiate the re-instatement for you. The lender must agree to the re-instatement or the debtor must be legally entitled to re-instate the debt. Plan to provide evidence that you can afford to pay the debt. Re-instating the debt may seem like an easy solution for the lender. Even though you may not be in default with the lender, other than the bankruptcy, the lender should be confident that you will not default again in the future.

About the Author

Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.

Photo Credits

  • Stockbyte/Stockbyte/Getty Images