What is a loan default?
Loan default occurs when the borrower breaches a material term of their agreement. The common reason in loan default is that the person is not able to make the loan payments he had once committed. When a loan default occurs, the lender has the right to take legal action against the borrower. Thus, negatively impacting the credit history of the borrower.
What happens when you default on a loan?
This, indeed, is based on your lender and the type of loan. Some lenders would be counting even one missed payment as default. However banks wait until you have missed multiple payments, or banks and other financial institutions wait till at least 30 days before considering your loan as a default.
Once your loan is considered a default, the lender will contact you. The lender’s remedies will vary based on the loan agreement, and it also depends on the bank and financial institutions
- Higher expenses
Defaulting on your loan can trigger late payment fees. In addition to that, since your credit score has taken a hit, any future loans that you will be opting will have higher interest rates.
- Legal claims
Your account might be sent to a collection agency, and you might start getting calls for collections. In some cases, the lender might sue you to collect on the debtor to liquidate any collateral you have provided in the exchange of the loan. Such legal claims are time-consuming, and they affect your creditworthiness in the market.
- Low credit score
The lender will report each missed payment to the credit collection, and that will negatively affect your credit score. More the payment you miss, the more your credit score gets impacted.
The specifics vary on the type of loan you have. When you are applying for the loan you have to include a personal guarantee to pay back the loan, you might be providing any collateral in exchange for the credit. Now let’s look at what happens when you default the secured and unsecured loan.
Defaulting on a secured loan
A secured loan is one needs to put up collateral for the loan. Examples are a home loan, car loan, etc. if you default on the loan and you are not able to work on the agreement with the lender, the lender will seize the collateral, liquidate it and can take away the money. In some of the states, the lender can claim collateral without seeking the permission of the court.
One must try to avoid the size of the collateral and should work out on the payment plan or another kind of solution.
Let’s assume that Mr. X has taken a housing loan from the bank he is making regular payment of the loan installments suddenly Mr. X loses his job and he finds challenging to pay off the housing loan. In this situation, the bank will come to Mr. X and will declare that they will claim his house. Banks make sure about the valuation of the home and notice that the market value of a house isn’t enough to pay off the entire amount. So the bank will sell the house and asks Mr. X to pay the difference.
Defaulting on an unsecured loan
An unsecured loan is one that doesn’t require you to put up specific collateral. Many business loans that you get online offers by different lenders are unsecured. However, one should note that even an unsecured loan will require a personal guarantee from the borrower. Once you miss a payment, the lender will generally begin charging late fees and might also raise the interest rate on the unsecured loan. And even if you are not able to pay the loan amount they will file a lawsuit against you. Depending on the term loan, they might be able to seize business assets such as vehicles, real estate, equipment, or your business owns.
Defaults can negatively affect your credit, which could affect your ability to take out loans or enter other types of credit contracts in the future. How do you prevent or resolve a default depends on the lender, the type of loan you choose, and your particular circumstances, but communication is often vital. Face the issues head-on, and you would be able to find a solution that works for both.