As much as we’d like to plan for the future, sometimes things go awry. Your work may have been forced into downsizing and have started letting people go. Alternatively, you could have incurred an unexpected (and often large) medical expense. These unpredictable events make it hard to stick to a plan and you may find yourself defaulting on a loan payment. Read on to find out what happens when you default on a loan.
When is a loan in default?
Generally speaking, a loan is in default when payment is late by thirty to ninety days. The exact timing of the default will be specified in your loan agreement, usually under the heading ‘payment terms’.
What are the consequences of defaulting?
There are several consequences associated with defaulting on a loan. This will depend on the type of loan and the loan agreement.
Late Fees
If you are a few days late on making a payment, you may be charged a late fee. The late fee can be a fixed dollar amount or a percentage of the payment due.
Repayment of Loan
If you have a long outstanding payment, the consequences will depend on whether the loan is secured or unsecured.
Secured Loan
A secured loan is a loan guaranteed with an asset. The asset can be your car, house, or any other valuable property. The asset should be specified in the loan agreement as the security or collateral.
In the event that you have defaulted on a scheduled payment, the lender has the right to seize the asset. They can then sell the asset in order to recover the outstanding cost of the loan.
Unsecured Loan
Alternatively, an unsecured loan means that you haven’t provided any security or collateral. Thus, if you default, the lender has nothing to sell to recoup their losses. Rather, the lender will have to proceed to debt collection. This may result in a court order mandating wage garnishment or the sale of property.
Wage garnishment places an obligation on your employer to withhold a portion of salary for the repayment of the loan. It may also be extended to cover interest and the lender’s court fees. On the other hand, the court may allow the lender to seize and sell some of your assets in order to pay off the loan.
Credit Score
Defaulting on a loan payment can have a significant impact on the ability to obtain future lines of credit. Firstly, a default lowers your credit score as it reflects an inability to pay on time. Secondly, a default will remain on your credit report for five years (even if the overdue amount has been paid). Thirdly, you will struggle to find good deals on loans for the foreseeable future. You’ll find interest rates will be higher to offset the lender’s risk.
Conclusion
If you are experiencing any sort of financial struggle, contact your lender as soon as possible. Prolonging communication and avoiding the situation will only make matters worse. Remember that it’s in the lender’s best interest to help you meet your payment obligations. The lender may be open to amending the terms of the loan, extending the grace period or temporarily suspending payment obligations.
Additionally, it’s important that you are familiar with the terms of the loan agreement. The loan agreement will outline your rights and responsibilities, as well as the lender’s. Your vigilance will help to ensure that the lender does not take advantage of the situation by engaging in unlawful practices.
If the situation has escalated to court action, it is advised that you consult with a lawyer. A lawyer will be able to guide you through the process and help identify the best course of action.
