You may take a loan online with every intention of repaying it on time, but then something unforeseen occurs, and you default or fall behind on your repayment plan. Unexpected external circumstances like the coronavirus epidemic, job loss, missed payments, and other situations, can lead to loan defaults. Many homeowners could not fulfill their mortgage payments because of the COVID-19 problems. According to the Mortgage Bankers Association report, the U.S. mortgage delinquency rate reached 8.2% in 2020, although it declined to 5.47 percent in 2021.
Whether you take a loan from traditional lenders like a bank/credit union or an online lender, here’s what happens if you don’t repay a debt or otherwise default on it.
Loan Default Explained
In simple terms, the borrower’s failure to pay off his debt according to the initial loan agreement may result in loan default. The period required to enter your debt into default may vary depending on a loan. You may be charged late payment penalties, and your debt may be classified as “delinquent” if you fall behind on your repayment plan or miss a few payments. However, you can quickly get back into good standing once you start making on-time payments within a reasonable time frame. If you cannot pay in full according to the conditions of your initial credit argument, you will again be considered in default.
Expected Consequences of Loan Default
Default on your contractual obligation may result in severe consequences. Primarily, a loan default will be a red flag for other financial institutions proving that you are a risky borrower. To learn more about the loan default, let’s have a close look at the most common consequences you may expect to experience once you fail to make on-time payments.
Credit Score Drop
A credit score will undoubtedly drop if you go into loan default. Several criteria determine your credit score, but payment history is the most important one that makes up 35 percent. The credit history covers all open and closed credit accounts, including credit cards and personal lines of credit.
If you miss a payment, a lender may file a delinquency record. You’re usually safe if your debt payment is 30 days past due. However, any missed payments wound up in default will likely be recorded to one of the three major credit reporting agencies (Equifax, Experian, or TransUnion), thus lowering your credit score.
Important to Know: Low credit scores may influence many aspects of your life. Renting, getting a job, signing up for utilities and cell phone service, and purchasing insurance may be more difficult.
Defaulting on a loan might potentially raise your debt. Late fees, fines, and legal costs may increase your debt, raising the initial amount owed.
Indeed, when compound interest is taken into account, outstanding debt starts to accumulate swiftly. If you decide to skip a payment, interest charges will be added to the principal balance. The interest will be charged based on a larger amount that can quickly pile up in the future.
When all reasonable attempts to make you pay off debt fail, a lender may send your account to collections. Aside from being costly and resulting in court judgments, collections may harm your credit and stay on your credit report for seven years. Be informed that your lender is lawful to garnish your paycheck or withhold money from your account, of course, based on a court judgment.
Consequences of Different Loan Types
Defaulting on a loan has different implications depending on the loan type. Some may include built-in remedies, while others rely only on faith.
Secured Cash Advances
If you have a collateralized cash advance and fail to pay it back, your lender may retrieve collateral to recoup losses. For instance, if you have a car loan, your vehicle may be repossessed and sold to compensate for damages. However, if the automobile price is less than your debt amount, you may be held accountable for the difference.
When it comes to unsecured loans (those with no backed collateral), lenders can only affect your credit to recover through legal means. For instance, if you default on a federal faith-based student loan, your lender may demand remedies via other federal agencies, such as withholding tax returns, garnishing earnings, or reducing Social Security benefits. Credit cards are also classified as unsecured debt, defaulting on which may significantly impact your credit score. Plus, you may expect excessive fees and collection calls trying to make you pay back as much of the initial debt as possible.