8 out of every 10 Americans have something in common – Debt! Whether it’s home debt, student debt, car debt, or credit card debt, millions of people pay interest to lenders every month to hold onto things they’ve purchased that they can’t afford in cash.
So, what happens when you default on a loan?
If you’re curious to know what will occur and what you should do pre/post-default, keep reading. Below, we share tips that’ll help you navigate the rapids of unpaid lending products.
1. A Notice Will Come From Your Lender
The very first thing that will happen just before your loan goes into default is that you’ll receive a notice from your lender. This notice might come via email, phone, or most likely, via a letter in the mail.
When you receive notice from your lender, do not ignore it. Ignoring letters explaining issues you’re incurring regarding debt does not make those issues go away.
Knowledge is power when you’re navigating a loan default situation so relish the opportunity to get informed on where your lender is at so you can take appropriate steps rather than sit in the dark.
2. Call and Explain the Situation
Your lender has gotten the ball rolling on your loan default. After they’ve notified you of your lack of payment, the next what happens when you default on a loan step falls on you.
That step will be to pick up the phone and get in contact with your lender.
Lenders don’t want to have to chase you down for money, harass you, sue you, etc. All they want is a promise that at some point, your loan will be repaid. If you can give them that assurance, they’ll be more than willing to work with you.
When you call your lender, let them know why you’ve fallen behind on payments and request their assistance. This assistance usually comes in one of two ways:
Deferral of loan payments is when your lender allows you to take a mostly penalty-free beak from not paying what you owe them. This is done for a specified period that in theory, will allow you to fix whatever problem in your life is preventing you from making payments.
Interest may still accrue on your loan during this period but fees will not.
If the amount you’re needing to pay each month has become insurmountable, most lenders will be more than willing to extend the life of your loan and further spread out payments. This arrangement can lead to a steep drop in what you owe each month which can make getting back on track with your debt a possibility.
Lower payments across more months doesn’t mean you’ll be saving money in the long run of your loan, of course. The longer you hold your loan, the more interest you’ll pay.
By spreading your loan payments, however, you will find it easier to keep up with your monthly expenses.
3. Your Loan May Go Into Default
For those of you that were not able to or were unwilling to work out an arrangement with your lender, your loan will likely go into default. The consequences of this vary based on the kind of loan you had.
Potential consequences include:
Loans issued through government entities can be collected in several cases through wage garnishment. Wage garnishment is when an entity is legally able to reach into your bank account and empty portions of what they’re owed every month.
People that default on student loans, for example, may experience wage garnishment
Are you defaulting on a secured loan? If you are, whatever property you secured your loan with is going to be reprocessed.
An example of a secured loan is a car title loan. With that loan type, your car would be reprocessed to help make your lender whole again.
When you default on a loan that is non-wage-garnishment eligible and doesn’t have property securing it, a lender may choose to take you to court. This is somewhat common in the world of credit card debt.
A court may order you to pay back your debt, the sale of your property, or other means of collections.
Most debtors would prefer to forgo court, particularly on small amounts of debt. In these cases, lenders might sell your debt to a third-party that will then harass you endlessly trying to get your to pay at least a portion of what you owe.
This harassment can come via phone calls, letters, and other more creative means.
4. Get an Attorney’s Help and Start Rebuilding
Once the consequences (or potential consequences) of your loan default become clear, consider hiring an attorney to help you mitigate damages. If you’re curious to know “are treasury collection fees unreasonable?”, “Do I have legal recourse against harassment” – they can help.
As they assist you, stay focused on managing outstanding payments you’re carrying from other lenders so you can start rebuilding your credit and avoid further problems.
You Now Know What Happens When You Default on a Loan
Knowing what happens when you default on a loan is half the battle of managing resulting problems. The other half of the battle is you staying communicative and proactive.
We hope our guidance helps you navigate your debt issues and we welcome you to check out more content on our blog should you find yourself in need of additional information.