What Is a Repayment Plan?

How Does a Repayment Plan Work?

The way repayment plans are structured depends on the type of debt you have, but they typically have fixed monthly payments and a clear timeline for when the debt will be repaid. Installment loans disburse funds in one lump sum and typically have standard repayment plans with specific loan terms, interest rates and monthly payment amounts. In most cases, these details will stay the same as long as the debt is in repayment.

But the term "repayment plan" can also refer to an arrangement you opt in to with a lender if you're looking to make your payments more affordable. This might be the case if you're expecting your income to change or you're already having a hard time keeping up with your payments. Below are the types of debt that usually offer these kinds of repayment plans.

Student Loans

Federal student loans have a standard 10-year repayment term, but you may have options if your payments feel too high for your budget. You can compare federal student loan repayment plan options using the Department of Education's Loan Simulator tool. That might point you toward the following:

• Income-driven repayment plans are typically calculated based on a percentage of your discretionary income. In some cases, your monthly payment could be as low as $0, depending on your family size and income. Your remaining balance might also qualify for loan forgiveness if your loan isn't paid off when the repayment period ends, which may be as long as 20 or 25 years.
• Extended repayment plans allow you to stretch your loan term up 25 years, which reduces your monthly payments, but you'll have to meet certain eligibility requirements.

Tip: Private student loans typically don't offer the same scope of repayment options as federal loans. Every lender is different, but the repayment terms will likely be clear when you apply for the loan.

Mortgages

When you take out a mortgage, you'll likely choose between a 15- and 30-year loan term. A shorter term means that you'll pay less interest over the life of the loan, but your monthly payments will be higher (and vice versa). With a standard mortgage repayment plan, your monthly payment will typically go toward your principal balance, interest, taxes and insurance (PITI):

• Principal: Your outstanding loan balance
• Interest: The finance charge you pay monthly, which is determined by your interest rate
• Taxes: Property taxes
• Insurance: Homeowners insurance and mortgage insurance, if you have it

If you go with a fixed-rate mortgage, your interest rate will stay the same for the life of the loan. However, your monthly payment could fluctuate if your property taxes or insurance costs go up. Adjustable-rate mortgages (ARMs) work a little differently. During the early years of your loan, you'll have a fixed rate that's usually lower than average market rates. When this period ends, your interest rate will change periodically depending on the terms of the loan. That means your rate and monthly payment could go up and down over time.

No matter which type of loan you choose, if your payments are straining your budget, contact your mortgage servicer to see what your options are. That may include forbearance, which can temporarily reduce or pause your mortgage payments while you get back on your feet. You can also explore:

• A mortgage repayment plan: If you've missed any mortgage payments, a repayment plan can help you catch up on what you owe. That might involve increasing your monthly payments or adding extra payments at the end of your loan term.
• Mortgage modification: This can reduce your monthly payment if you can demonstrate a financial hardship, but you'll likely pay more over the long run.
• Refinancing: This is when you take out a new mortgage that has a lower interest rate and monthly payment, but you'll be on the hook for closing costs. This usually costs between 2% to 6% of the loan amount.

Other Types of Debt

The following creditors might also offer repayment plans:

• Credit card issuers: Standard credit card repayment typically requires cardholders to make at least a minimum payment each month they carry a balance. Card issuers may also offer credit card hardship programs that are designed to help borrowers who are struggling with their payments. That could open the door to a lower interest rate and help you get ahead of your debt.
• Health care providers: Repayment plans for medical bills can allow you to pay off your balance in affordable monthly installments. That could come in handy if you experience a medical emergency and high out-of-pocket costs.
• Auto loan lenders: You'll typically repay your auto loan in regular monthly installments. If you're struggling to make your monthly payment, your lender may offer auto loan hardship programs that can reduce your monthly payments, modify your car loan or allow you to temporarily defer payments.

Pros and Cons of Repayment Plans

Every repayment plan is different, but here are some general benefits and drawbacks to consider. Understanding them can help you decide if it's the right option for you.

Is a Repayment Plan the Right Option for You?

Whether a repayment plan is right for you depends on your financial situation. Here are some helpful questions to answer:

• Are you struggling to keep up with your payments or have a history of missed payments?
• Are you expecting your income to go down in the near future?
• Are you OK with potentially paying more interest over the life of the loan in exchange for lower payments?

It's also a good idea to reach out to your creditors directly to see what relief programs may be available to you. That can clarify your options so you can decide the best way to move forward.

Learn more: How to Choose the Best Student Loan Repayment Plan

Frequently Asked Questions

The Bottom Line

A repayment plan often describes how an installment loan will be repaid over time. It can also refer to a special arrangement you enter into with a lender to make your payments more affordable. Either way, the most important thing is to repay the debt as promised. Having a history of on-time payments can help improve your credit score, but the opposite is also true.

Free credit monitoring with Experian can make it easy to stay on top of your credit and track your FICO^® Score.