Racheal Vazquez

What happens if I default on a loan is a question that pops up in most peoples’ minds when borrowing money. You may have such a difficult time trying to get your finances under control. Often, it may seem like there are no options.

While defaulting on loans may seem like a scary thought, there are always solutions. This article will go over the legal framework surrounding loan defaults and outline your options.

When is a personal loan in default?

Defaulting on a loan happens when you fail to make your due repayments in time. But, have you ever wondered what would happen if you default on a loan? It’s a question that probably doesn’t cross your mind too often, considering most loans repayments are in full.

But what are the consequences of defaulting?

  • Can you get sued?
  • Will your wages be garnished?
  • How will that affect your credit score?
  • What kind of options do you have for getting out of debt when faced with this situation, like a loan modification or bankruptcy?

Failing to meet your payments as outlined in a loan agreement exposes you to legal action from the lender. When your monthly payment is at least 30 days overdue, then you have defaulted. At this point, you may receive a debt collection letter from a debt collection company that intends to act on behalf of the lender in an attempt to recover the funds.

Defaulting on A Personal Loan Consequences

There is a difference between presenting your “failure to make payments” and just plain “defaulting” for the bank and other lenders. If you are not careful, there are serious negative consequences to defaulting on a personal loan.

Reduction Of Credit Score

When you default, your credit score takes a serious hit due to factors like:

  • How long you are past due
  • How high your credit score could be

For instance, if you pay mortgage two months late, it may have resulted in your score diving down, which will take quite some time for your credit to recover.

Bad credit can make it difficult to rent a property and get employed, among other things. A bad credit score can also make loans expensive.

Confiscation Of Loan Security

When you default, your lender might ignore your legal rights in an attempt to recover what’s rightfully theirs. If you have valuable assets, the lender can take any property you listed as loan security and sell them to reduce the loan. In this instance, you might have used a car logbook or a land title.

Lending out money is risky business especially for the lender. Should you fail to repay, there’s a chance the lender might incur uncollectible personal loan tax deduction, let alone consider the loan a bad debt.

Your Guarantors Will Be in Problems

A guarantor is someone who agrees to pay on your behalf in case you default. If you default on the loan repayment, the lender will hold the guarantors responsible for repaying your loan. Defaulting could therefore break meaningful relationships you may have.

When borrowing, ask your yourself; can a spouse’s wages be garnished? If you have a spouse and you have joint assets or file jointly, chances are the lender can garnish their wages. This can happen whether they are your loan guarantors or not.

Auctioned by Debt Collectors

By the mention of auctioneers, people tremble. Some lenders seek the services of debt collection companies to track down personal loan defaulters.

Auctioneers informally or formally act on behalf of the lender. When collecting overdue debt, they take money or attach and auction property you listed as security to raise the loan balance. Auctioneers often ignore the rules set out under the practice and act unfairly for their gain through harassment.

Wage Garnishment and Placement of Lien on Property

Other than auctioneers, debt collectors can use legal ways to push you to pay the loan. They will sue you for defaulting, resulting in a court sermon. Failure to attend might put you in more problems with the authorities because you automatically lose the case.

This way, the debt collector can put a lien on your house or property. This means that you cannot sell the property or secure a loan using the property. In the case of minor claims, small claims court garnish wages so that your employer automatically services the loan.

Interest On Loan Default

Some lenders calculate and implement multiplying penalties on late loan payment. This approach makes it expensive to the defaulter in the long run.

Generally, defaulting on personal loan consequences have far much-reaching effects. You should be able to prevent these effects beforehand by reaching out to your lender in good time.

What To Do If You Face Loan Default

  • Meet The Lender and Renegotiate Terms: Reach out to the lender before the payment date. Explain your situation to the lender, and he may give you some reprieve. For example, allowing you some time off to re-organize yourself or defer loan deposits.
  • Be Conversant with Your Rights: Know your personal loan defaulter rights as outlined under the Fair Debt Collection Practices Act (FDCPA) in case of default. Debt collectors can sometimes use illegal avenues while trying to collect debts if you appear naive. Threats and harassment are some tactics that they apply to make the debtor give in. If you face harassment, you have the right to contact Consumer Financial Protection Bureau or your state’s attorney general.
  • Find An Attorney: If you have received a court sermon, contact your lawyer to determine the next cause of action. However, you must still attend court to avoid the judge ruling in favor of the lender under default judgment.
  • Contact A Debt Counselor: For you need to manage your debt, a credit counselor is in a position to give you professional advice. He will help you create a debt repayment plan, set a budget, or negotiating debt with creditors to pay less than the entire balance owed.
  • Seek Help from Friends and Family: Before moving to a lender to take a secured loan, first work out your loan amount, then talk to friends or family. You might just end up not borrowing all of the money you seek.
  • Enquire With Your Employer: If employed, talk to your company’s representative, preferably your human resource manager. Inquire if the company has the policy to cushion employers who have loans in case you face default. Of course, this shouldn’t be a reason to go ahead and intentionally default.

Final thoughts

There are various reasons you might default on a loan, and knowing what they are, can help you avoid this outcome. When you sign a loan, you enter into an agreement outlining the terms of repayment. If you fail to adhere to the repayment plan, your lender has the right to take legal action against you. Let this not be the case. If it happens so, follow the proper channels to repay.

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