Money Smart Athlete Blog

Consequences of a loan default: The 4 Critical Questions

As a debtor, you should strive to meet the legal responsibility of your loan repayment. We know that you had every intention of paying back that loan you took out when cash was tight. Nevertheless, now you’ve fallen behind by a payment, or maybe two, for several reasons. Or maybe it isn’t likely you’ll be able to catch up on those loan payments anytime soon.

The failure to promptly pay instalments or interest when due, can create a multitude of problems both in the present and the future. As a Money Smart Athlete, you should know what really happens if you default a loan. Whether the loan came from a traditional source like a bank or an alternative lender, we are here to answer four critical questions, so that you are aware of the consequences of a loan default.

Q.1. What Happens When You Default on a Loan?

Lenders have their own guidelines for considering a loan to be in default. Some will take action after one missed payment while others will wait for months. Lenders will contact anyone who has let a loan go into default, and as time passes, the communication will become more aggressive and annoying. In as little as 30 days after a missed payment, a lender may contact credit bureaus, which will cause your credit score to start declining.

Q.2. Can a Lender Take Your Possessions if You Default on Your Payments?

If the loan is a secured loan, you had to put up some kind of collateral to get it. In that case, if you default, you will lose the collateral. A good example of this is a car loan. If you default on the money the bank gave you to purchase a car, the bank can repossess that car and turn around and sell it to someone else as a way to recover the amount of the loan.

Lenders are in the business of making money by recovering the amount of the loan granted plus interest. Quite often, banks or other lenders require you to provide collateral in order to be approved for a loan. If the only way for a bank or lender to recover the loan and interest from you is to seize the collateral, they will.

Q.3. What Happens with Unsecured Loans?

If you didn’t put up any collateral for the loan, it is considered unsecured. If you’re behind on payments, the lender may begin adding fees and increasing the interest rate. If the lender considers a debt in default, the loan may be turned over to a collection agency. If the collection agency is unsuccessful in securing a loan repayment, it can take the matter to court and may proceed with garnishing your salary or putting a lien on any other assets that you may own.

Q.4. Are There Problems that Remain after Defaulting on a Loan?

The borrower’s credit score will take a significant dive after defaulting on a loan, which will make it more difficult to secure any credit in the future. Even if a lender is willing to take a risk on someone who has previously defaulted on a loan, the interest rate will probably be much higher than it would be for someone in good credit standing.

From the answers to the four critical questions, it can be derived that defaulting on a loan can create multiple negative consequences to your finances. Therefore, if you are not in a financial position to pay your instalments on time, make sure that you contact the right person to help you with restructuring your loan terms, in order to accommodate your paying capacity.

If you need any information on how a loan default will impact your finances and what should be done to alleviate its effects, do not hesitate to get in touch with us at [email protected].