What happens when you miss a personal loan? – Councilor Forbes
It happens to the best of us. No matter how hard you try, sometimes life conspires against you and you have to default on a personal loan.
It’s always worth considering what you could have done differently. But often you couldn’t have done anything – you can’t always avoid job loss, illness or disability. Even if you would do things differently a second time around, defaulting on a loan doesn’t mean you’re a bad person. And more importantly, there are ways to overcome it.
What does defaulting on a personal loan mean?
Default on a Personal loan means that you are behind in the payments that you accepted in the loan agreement. Once you default, the lender can take the following steps to get back the money you owe them.
Technically speaking, you could be considered in default after missing your first payment. But because debt collection is an expensive process for the lender – and you might pay yourself – they’ll usually wait until you’re at least a few months late before applying the default provision of the contract. The default can also vary depending on the lender and the terms of your loan agreement.
How the default loan works
Once you default on a personal loan, it opens up a whole new chain of events, and your lender can start trying to get their money back. Defaulting can also have a range of negative consequences on your credit score and, ultimately, on your wallet. However, if you are faced with a default, it is important to realize that you have power – there are people who can help you and you have protections under the law.
The Fair Debt Collection Practices Act (FDCPA) spells out exactly what debt collectors can and cannot do. For example, debt collectors are not allowed to harass you by threatening violence, using obscene language or other shady tactics.
Consequences of defaulting on a personal loan
Nothing good can come from defaulting on a personal loan. But preparing yourself for some of the common consequences can make the process less frightening. Here’s what you can expect:
It will hurt your credit score
Your late payments, even before you are considered to be in default, will be reported to the credit bureaus. It will likely harm your credit score. Depending on your score at the start and how long you were late, this could significantly affect your score.
A FICO study showed that paying your mortgage two months late could drop your score by up to 130 points, and full recovery could take about seven years.
Having a bad credit score hurts you in many ways. This can make it more difficult to rent a home, buy a house and get a job, among other things. Even though you can get approved for a loan, a bad credit rating can make it much more expensive.
Your lender can take your collateral
If you have a secured personal loan, your lender can actually take any collateral you have provided to secure the loan. For example, if you have used your car as collateral, your lender can repossess your vehicle. If you used a savings account or CD as collateral, they can take that as well.
You will harm your loan co-signer
Likewise, if you have a co-signer of your loan, this will affect them as well. This could hurt their credit score as much as yours, and the lender may contact you. and your co-signer to collect payment. At best, this leads to awkward Thanksgiving dinners. At worst, you’ve irreparably damaged an important relationship.
You can be harassed by debt collectors
“Collections” is one of those dreaded words that no one wants to see. If you are in default on your personal loan, your lender may try to collect this debt themselves, hire a collection agency to collect the money, or even sell your debt to someone else like a private debt collector. .
The last two possibilities – collection agencies and private collection agents – are of particular concern. This is a rather unscrupulous industry that often ignores the rules set out in the Fair Debt Collection Practices Act that are designed to protect you. According to investigation from the Consumer Financial Protection Bureau (CFPB), 25% of those contacted by debt collectors feel personally threatened.
You can have your wages garnished and a lien placed on your home
One of the legal tactics that debt collectors have in their pockets is to sue you for the debt. If this happens, you will need to go to court. If you don’t, the judge can automatically rule against you. In the event of a judgment against you, the debt collector can garnish the wages from your paycheck.
Another scary possibility is that the debt collector may have a lien placed on your house. This may prevent you from selling it or taking out a home loan or line of credit. In some cases, the debt collector may even force you to sell your home to pay off the debt.
What you must do before you default
Suffice it to say that defaulting on a personal loan is never a good idea.
If you are not yet in default, but think you are close or are having difficulty making your payments,the the best advice we can give you is to contact your lender. It’s difficult, and it can be embarrassing, but you can save yourself a lot more hassle and embarrassment down the road. If you’re faced with the default, try these suggestions before giving up:
- Talk to your lender. Tell your lender what’s going on. Is this a temporary setback or do you see no way forward for the remainder of the loan term? If it’s temporary, your lender might postpone some of your payments or offer another solution. If it’s permanent, they can adjust the length of your loan or suggest another idea.
- Ask your friends and family for help. While borrow money from family is not always ideal, it may be your best option – or the only one – in the event of a default. Make sure you understand the amount you owe on the loan and figure out how much you need to borrow. Then pitch the idea to a supportive friend or family member, agree to the repayment terms, and formalize the deal.
- Check with your employer. Likewise, some employers have programs in place to help team members overcome financial difficulties. If you are unsure if this is an option, contact your company’s human resources department to find out.
- Seek credit advice. Sometimes the lender is just not willing to work with you and you have no other source of funding. If this is the case, a good option is to seek help from the non-profit organization. National Foundation for Credit Counseling (NFCC), which offers real live advisor help for free – or at least at a reasonable cost.
How to get out of default on a personal loan
Sometimes it’s too late to prevent your loan from defaulting. It’s unfortunate, but again, you’re not out of options and you have legal protections.
In this case, you may also want to contact an NFCC debt counselor. They can act as a go-between between you and your creditors to craft a debt management plan that gets you back on track. Beware of for-profit debt settlement companies, however, as they can charge high fees and lead to unintended tax consequences.
If it’s been a long time – years – since you’ve made a payment, it might be time to find out about your state’s statute of limitations. At some point after the default, debt collectors cannot sue you for the debt, even if you still have a big scar on your credit report. In this case, it may be helpful to consult a debt lawyer, as they can advise you on your options and legal protections. And, if you are sued for debt, a qualified lawyer can help you with this process as well.
As difficult as it may sound, you can still overcome a personal loan default. Negative ratings disappear from your credit report after about seven years, and it will be as if it never happened, at least in terms of credit. In the meantime, there are other steps you can take to improve your financial situation, such as save an emergency fund, increasing your income or checking your spending habits so that next time you don’t even need a personal loan.