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