What is a Loan Workout?

A loan workout is an agreement between a lender and a delinquent borrower to put the borrower's loan payments back on track. A loan workout can involve a variety of adjustments to the original loan agreement, such as the following:

Spreading the payments over a longer period of time.
Writing off part of the loan balance.
Reducing the interest rate on the remaining balance of the loan. A variation is to switch to a variable interest rate.

The lender has an interest in allowing these adjustments, since the alternative may be the bankruptcy of the borrower or the complete nonpayment of the loan, which will require the lender to engage in expensive foreclosure activities. In short, a loan workout is acceptable for the lender when it is the most cost-effective option available.