Informal Payment Arrangements: Are They Right For You?

Informal payment arrangements can be a perfect solution for temporary setbacks. Everyone experiences these from time to time, and an informal payment arrangement can be a great way to get back on your feet without any extra financial consequences.

But what exactly is an informal payment arrangement?

Put simply, an informal payment arrangement is an agreement between you and your creditors that is not bound by legislation or a formal contract, hence the term ‘informal’.

And while it’s similar to a debt agreement, it’s not considered an act of bankruptcy, so it won’t go on your record or negatively affect your credit file. It’s a great way to settle debt with your creditors, ensuring that everyone is happy with the final outcome. Now, let’s determine if an informal payment arrangement is right for you.

What Is a Payment Arrangement?

First, let’s discuss in more detail what a payment arrangement actually is. A payment arrangement is when you (or a third-party advisor) negotiates with your lender to determine a new payment strategy. It might be delayed payments or even lowered payments, but it’s usually only for a set period of time (1-6 months). 

What’s an informal payment arrangement? As the name implies, an informal payment arrangement is one you’ve entered with your lender informally. Unlike a formal payment arrangement, this isn’t reported on your credit report or affect your credit rating. 

What Are the Benefits of a Payment Arrangement

Why choose an informal payment arrangement rather than another type of debt solution? There are a few reasons why this is a beneficial agreement for most borrowers in need of a temporary solution:

  • Short-term – First, this is different from other types of debt solutions because it’s ideal for the short-term. If you’ve just experienced a temporary set back, this is a great option. Generally, your creditors are willing to work with you if it means they can get you back to your original repayment schedule.
  • Keep your borrower relationship – If you’re in good standing with your lender, you don’t want to ruin that with a drastic solution or by failing to pay on time. An informal payment arrangement can also help you maintain a better long-term relationship with your creditors, as they can see you’re committed to repaying your debts despite this setback.
  • Reduce your debt – With an informal payment arrangement, you may be able to reduce your overall debt by making monthly payments that actually fit within your budget. Your creditors may also decide to freeze your debt, that way you can catch up on the principal rather than worrying about the interest piling up, which again saves you money in the long term.
  • Avoid bankruptcy – Most creditors know that they may not always be able to recoup all of the money they’ve lent out, but with an informal payment arrangement they can still at least reclaim the majority of it. If you leave your debt until later, you might end up having to declare bankruptcy.
  • Protect your credit report – In some cases your creditors won’t contact any of the credit reporting agencies, so your credit report will remain clean or at least not take any further hits.

However, it’s important to understand that this is a short-term solution. If you’re facing a long-term debt problem or set back, you’ll likely need to choose a more long-term solution for your debt and financial situation. 

Informal Payment Arrangement vs. Debt Agreement

While debt agreements and informal payment arrangements offer many of the same benefits like relief from creditors, frozen interest, and reduced debt, the main difference is that an informal payment arrangement will not go on your record and negatively affect your credit score. 

Since it’s not considered an act of bankruptcy, you can still maintain your current credit score, which is great for any future credit checks. Ultimately, an informal payment arrangement is a temporary solution that doesn’t impact your credit long-term. 

Does a Payment Arrangement Affect My Credit Score?

As we said above, a payment arrangement shouldn’t have a significant impact on your credit score, if any. An informal payment arrangement usually isn’t reported to credit bureaus at all, meaning you’ll face no impact to your credit score. 

However, it’s a good idea to talk to your lender about what actions they will take. Many will work with you as long as you’re making an effort to continue to repay your debt. 

Risks of an Informal Payment Arrangement

Finally, there are some risks that come along with an informal payment arrangement. Since these are informal, they are not protected by court orders or legislation, you’ll just be relying on your creditor’s goodwill. They can technically cancel your arrangement at any time. 

The good news is that it’s highly unlikely that they’ll cancel as long as you’re sticking to your side of the agreement. However, this is why it’s important to seek expert help to negotiate your informal payment arrangement. Debt management companies often have long standing relationships with creditors, which goes a long way towards upholding arrangements and building trust.

Is an Informal Debt Agreement Right for You?

If you’re dedicated to making your payments, an informal payment arrangement may be right for you. They’re great for short-term financial trouble and can save you money in the long term without affecting your credit. On the other hand, if you’re struggling with long-term problems and setbacks, it might be time to consider a larger debt solution that addresses the root of the problem. 

It’s important to act quickly. The sooner you act, the more options you’ll have when it comes to working with your lender. Remember, your lender wants to get paid. If you’re willing to work with them, they’re willing to work with you.

Before you make a decision, be sure to consult our experts who can review your specific situation. We’re here to help! If you think an informal payment arrangement might be right for you, please contact our friendly team at 1300 368 322.

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