Not everything goes to plan as life is full of surprises and even though you had every intention of paying off your loans, something may come up like a job change or a health event that could put a spanner in the works. This may mean that you eventually default on your loans, but do you know how this will affect you? We take a look at what it means to default on a loan.
What Happens When You Default?
There are consequences of defaulting on a loan, which shouldn’t be a surprise. Defaulting on a loan will usually damage your credit and can cause additional expenses.
When you fail to make your required payment, your credit will take a hit. You might be in the clear for the first 30 days after the payment is due, but after this, missed payments are reported to the credit bureaus, which will lower your credit score. This will make it more difficult for you to secure a loan in the future and may make it harder for you to sign up to utilities, cell phone contracts, renting and so on.
Unpaid debts may eventually end up in the hands of collection agencies, which will damage your credit and can lead you to court which can be expensive. As time moves forward lenders might be able to garnish your wages or even take assets from your bank accounts.
On top of this, your financial burden may get worse when you default on a loan as this will incur additional charges like late payment fees, penalties and legal costs, which will just increase the amount that you owe.
Keep reading to find out how a default affects your loan type…
What Does a Default Mean for Your Loan
The type of loan that you default on will have different consequences.
If you have a secured loan that is secured with your home or car, then the lender can potentially take ownership of this property and sell it.
Unsecured loans, on the other hand, will damage your credit and lenders can take legal action against you.
If you bought your home with a loan or if you borrowed against your home with a second mortgage or a home equity line of credit, then your lender may force you out through foreclosure and sell your home so that they can recoup the loan costs. If the sale of your home doesn’t cover the whole amount that you owe, then you may find that you will still owe the difference.
If you default on a car loan, the vehicle can be repossessed and sold and you may still owe the difference if the sale doesn’t cover the total amount that you owe.
When you default on your credit card, your credit will definitely suffer as a result and your account will most likely be sent to collections. Also, fees will be added to your debt and collections will make endless phone calls and various attempts to collect.
Don’t Let It Come to a Default
The consequences of defaulting on a loan can be harsh, so it is best to avoid the default altogether.
If you run into financial trouble, then you must communicate with your lender and explain that you are having a hard time making payments.
A default can be looked at by your lender in one of two ways. The first is that you have given your lender a heads up and they could potentially work on a solution with you or they see that you have stopped paying and will start the efforts to collect from you. The first option is obviously the best.
If you are able to come to an arrangement with your lender, then ensure that you document all communications and get all your agreements in writing.
If you are struggling with debt, then it is a good idea to speak to a debt counsellor as they can help you to evaluate your position and set up a debt management plan if needed. Debt consolidation may also be an idea and you can find help through a number of debt relief programmes. Make smart financial decisions if you are in debt, so that you can avoid defaulting and so that you are able to manage your debt better.