What Happens If I Default on a Personal Loan?

When you signed the loan agreement, you had every hope of repaying your personal loan. However, life intervened — maybe a sudden work loss, accident, or divorce — and now you’ve missed a payment and are in danger of defaulting. After applying for the loan, it is important that you dully check the personal loan status.

If you are in default on a personal loan, your monthly payment is at least 30 days past due. As a result, your loan could be sent to collections, and your credit score could suffer.

Now is the time to act: Make contact with the lender and explain your circumstances. Some lenders will provide short-term relief to borrowers who have been affected by the COVID-19 crisis. By being vigilant, you can be able to prevent collateral harm.

Here’s what to expect if you default on a personal loan, as well as what you can do now if you’re in danger of defaulting.

When does a personal loan become delinquent?

A personal loan default occurs when a payment is 30 to 90 days late. The exact timing is determined by the type of loan, the lender, and the loan terms.

If a bill is just a few days late on a personal loan, it is overdue but not in default. After a 10- to the 15-day grace period, you can be paid a late fee. The fee may be in the form of a fixed sum ($15 to $40) or a percentage of the total amount owed (5 per cent to 10 per cent ).

The payment must be at least 30 days late for the lender to report it to the credit bureaus as a late payment. If you have good to excellent credit, late payments will lower your FICO credit score by as much as 100 points (690 to 850).

Defaults not only hurt your credit score, but they also remain on your credit report for up to seven years, making it more difficult to get new credit.

Implications of personal loan default

When you default on a loan, the lender either transfers the unpaid balance to its own collections agency or sells it to a third-party debt collector. The collection agency may contact you via phone calls, letters, e-mails, or text messages in an attempt to collect the debt.

According to Russ Ford, a financial planner and founder of Wayfinder Financial, if your loan is unsecured, the lender or debt collector will take you to court to claim restitution through wage garnishment or a lien on an asset you own, such as your home.

If your loan is backed by an asset like your vehicle, savings, or investment accounts, the lender has the right to seize the asset to recoup its losses, as specified in the loan agreement.

The lender could send a letter requesting payment if the loan was secured by a car title, for example. Ford claims it has the right to repossess the car if it is not charged within the agreed time period.

Finally, if you have a co-applicant on your loan, whether it’s a co-signer or a co-borrower, that person is liable if you default.

What to do if you’re about to default on a loan?

Make contact with the lender: Contact your lender until your next payment is due to be constructive. If you clarify your condition to the lender, he or she might be able to offer some relief, such as a temporary suspension or deferment of loan payments.

“Biting the bullet and dealing with it, as well as going to the loan company for assistance before it goes to collections or default,” Ford advises.

Understand your legal rights: If you’re facing default or your debt has already been sent to collections, know your rights under the Fair Debt Recovery Practices Act (FDCPA).

Debt collectors who use coercive, unequal, or misleading tactics to recover debts are breaking the law. You can file a complaint with the Consumer Financial Security Bureau and contact the state’s attorney general if a debt collector is threatening you or violating the law.

Make an appointment with a lawyer: If you’ve already been presented with a lawsuit, you should possibly seek legal assistance.

To escape a default judgment, in which a judge immediately settles the case favouring the lender or debt collector, you must appear in court.

Speak with a credit counsellor: A credit counselling service will help you improve your budget or develop a new budgeting plan, allowing you to free up cash to pay off your debts and keep current on all of your obligations.