When taking a loan from an individual or organization, one of the promises made is the duration and payment plan. However, if these conditions are unfulfilled, the loan can go into default. And that’s understandable because sometimes, your finances don’t work out as you planned on paper. And perhaps you intended to pay off all loans promptly, but life surprised you. Yes, life surprises the best of us in the most unexpected ways – failing health, family problems, money loss – the list is endless. All these can easily throw you off track.
So, the worst-case-scenarios is that you may eventually “default” on your loans. So, how does that affect you, your business, your credit, and your finances? Kindly continue reading this article to learn the several intricacies that surround defaulting a loan repayment.
What Is A Loan Default?
A default occurs after a missed payment of a loan. The exact time the payment goes into default after missing payment depends on the loan contract and the region’s laws. While some people deliberately default on loans by not making payments or simply being financially unable to, some people default on loans because they are unaware of the debt. In some cases, people might not receive late-payment notices for different reasons. Loan defaults occur in all types of loans, from student loans, mortgages, auto loans, and even credit loans for businesses.
What Causes Loan Defaults?
Sometimes, a loan default occurs as a result of a borrower’s decision not to pay. However, loan defaults are often caused by circumstances beyond the control of the borrower. These conditions lead to the borrower being unable to pay within the agreed timeframe. Some unprecedented events that can lead to loan defaults include illnesses, job loss, natural disasters, etc. Although, in some instances, the borrower might not remember the loan believing their payment has been automated.
Consequences of Defaulting on A Loan Repayment
Depending on the type of loan and the creditor, several possibilities could occur if you default on loan repayment. Your account can go into default if you miss a single payment. But if you miss multiple payments, most creditors would begin to consider your account delinquent, and the consequences would then depend on the type of loan and the lender.
If the lender has a collection department, then the loan default can be forwarded to the department to handle. If the lender does not have a collections department, they can employ a third-party collections agency service. Also, if the creditor gets a judgment against you, it can result in your tax refund or wages being garnished.
For some types of loans, defaulting can result in you becoming ineligible for any other loans. For instance, defaulting on a student loan makes you ineligible for loan options like forbearance and deferment or creating alternative repayment plans. The good thing about this type of loan is that you can get your student loan out of default and get back on a convenient repayment plan.
Most auto loans are secured considering that the vehicle is the collateral attached with the loan. If one defaults on this type of loan, the lender can choose to repossess the vehicle if no agreement is reached on time.
Can Defaulting on A Loan Affect Your Credit?
So, can defaulting on a loan affect your credit score? Yes, it can! Defaulting on loan repayment can affect your credit for a long time. Late payments, bad remarks, and collection accounts are some of the other things that can persist on credit reports affecting one’s credit scores negatively. The downside of this is that low credit scores make it difficult to access other financial products. Apart from this, it could even lead to higher interest rates on credit cards and other loans. Bad remarks on your credit report can also negatively affect job searches.
A way around this is to pay off an account in default or forward it to the collection department. Although, even this might not be enough to remove the effects of the default on your credit. The most important part is to try to minimize the amount of time the loan is in default. The shorter the default period, the better.
Avoiding A Loan Default
The possible options available in preventing loan defaults depend on the type of loan and the circumstances.
For instance, in student loans, you can choose deferment or forbearance to pause payments for a while without any penalties. This makes it a viable option if you are unable to make payments on time.
Irrespective of the type of loan, one of the best ways to prevent loan defaults is to reach out to the lender ahead of time and work out something. Some lenders have special programs to help borrowers going through tough times. Some of these repayment programs offer relief periods where you are not required to pay anything, while some lenders are even graceful enough to allow you to skip payments, allowing you to find a way around it.
If you can renegotiate your contract terms with the lender, you should endeavor to have it in writing. Ultimately, understanding the contract backing your loan and other related terms and conditions would help you effectively consider your best options if you are unable to repay.
This is one way to go around loan repayment. It is only available to borrowers with a fantastic credit score. So, you might not be able to access this feature if you have defaulted or had any issues with credit at any point. With this program, you can obtain balance transfer credit care without any introductory annual percentage rate. It is important to note that debt consolidation does not reduce the amount owed. It can only help reduce the interest rate and make other payments simplified.
What Should You Do If You’ve Defaulted on a Loan?
If you have defaulted on a loan payment, the next step is to control the damage as much as possible. The first step to get some of your credit back is to pay your past-due amount. This helps minimize penalty fees and avoid bad remarks on your credit record. Once this is done, you can then talk to the lender about working out another arrangement. If it seems too technical, you can consult a financial professional on your options and how to go about them.
In conclusion, loan defaults can have significant impacts on your finances. Because they significantly affect your credit, they can affect your ability to take out other loans or get access to other financial products in the future. If you want to take loans in the future for your business or other important projects, you must have something to fall back on to avoid a loan default!