Being able to keep up with repayments for your personal loan is not always possible. Unstable income, medical emergencies and job loss among other occurrences may drain your resources making loan servicing difficult. When that happens, it becomes an extremely stressing scenario with each delayed payment being closely followed by the credit bureau and lenders. The consequences of defaulting on your payments depend on a number of things including the initial terms signed with the lender and how far into repayment you are.
We are going to explore how the process of defaulting on a personal loan unfolds and some steps you can take to mitigate the situation and get back into the good graces of the lender.
Consequences of Defaulting on a Personal Loan
First, it is important to understand what it means to be in default of a personal loan. Most lenders will consider you loan to be in default between 30 and 90 days of a late payment. Within that period, the lender will usually report the missed payment to credit bureaus, resulting in an immediate drop in your credit score by as much as 100 points. Additionally, depending on the terms signed during initiation of the personal loan, the lender may charge a penalty for the late payment or revise the interest upwards as a deterrent.
For unsecured personal loans, there is little threat of losing your property to the lender. However, the lender will start taking steps towards recovering their money. One of those steps includes turning over the loan to a third party collection agency who will then contact you through various means. There are a number of statutory limits that financial authorities impose on collection agencies and you should be aware of these. Harassment tactics such as threats, insults and undue embarrassment should not be used. Nevertheless, the collector will be significantly more zealous in demanding payments than the lender’s in-house debt recovery team.
If the collection agency is unsuccessful in getting the money from you, they may take the matter to court where they may get a garnishment order or a lien on your property. The decision to grant such an action depends on the circumstances surrounding your missed payments. If unavoidable occurrences such as job loss or illness are to blame, the judge will likely rule in your favor, granting more time for you to repay or even requiring the lender to write it off. In case your personal loan is attached to one or more of your possessions such as a car, house or business, the lender has the right to claim it and dispose of it to raise their loan amount. The tragedy with this is that the collateral is usually of much higher value than the borrowed amount, representing a huge loss. Additionally, the payments already made may not be
How to Mitigate a Possible Personal Loan Default
If you anticipate financial difficulties that may prevent you from making timely payments on your personal loan, there are some steps you can take to get ahead of the situation. If you inform the lender beforehand that you are expecting some difficult times, you may be able to negotiate some easier terms such as lower repayments and longer grace periods for late payments. Another option that may help is asking your family, friends or even employer for an advance to enable you make sure you are in time with upcoming payment.
If the situation is dire, talking to a credit counsellor will help you get back on track, and they might even renegotiate with the bank to renegotiate for lowering of fees and interest, or even loan forgiveness. In situations where the collection agency has taken you to court, it is advisable to seek legal help. A lawyer will find the best way to represent your interest without ceding too many concessions to the lender. In case the collection agency has used unorthodox methods during their pursuit of the loan, a lawyer will immediately see that and will use it as leverage in court to get you a better deal. A final step may include considering bankruptcy if your situation is completely untenable. A chapter 7 bankruptcy may get you off the hook completely without having to lose any of your possessions. Meanwhile chapter 13 bankruptcy will allow you and your lender to draw up a plan to repay your outstanding loan, with many of the fees cancelled.
Resources:
1. https://www.nerdwallet.com/blog/loans/default-personal-loan/
2. https://www.loan.com/personal-loans/the-dangers-of-defaulting-on-an-unsecured-personal-loan.html
3. https://www.kabbage.com/blog/what-really-happens-when-you-default-on-a-loan/
4. https://www.finder.com/what-happens-personal-loan-default
