From mortgages to car loans and student debt, most people find themselves borrowing money at some point in their lives. As long as you're cooperating with a decent lender and regularly repaying your installments, that shouldn't be an issue.
However, hard times might not always allow you to make the payments on time. What ensues is a loan default. Let's examine the issues that could arise and how to handle them most efficiently.
What Are Loan Defaults?
A default happens after you miss a loan repayment. It can occur immediately after the date or months later, depending on your state laws and the terms of your agreement.
Either way, you should receive a notice before a lender declares you a defaulter. You'll find information about the exact conditions in your contract, but it always states the 'past due' time frame.
The same document contains information about what the other side will do afterward.
Potential Default Consequences
The exact consequences of defaulting depend on the lender and the credit type you took out in the first place.
The most severe outcomes include:
- Your lender has a third-party collection agency try to get the missing payments. In that case, you could face inconveniences with the collectors.
- Your lender sues you, garnishing your wages or tax returns.
Moreover, if you have a federal loan in default, you could not be eligible to borrow again in that matter. Alternative repayment plans that used to be within reach might become unobtainable, too.
If you borrow with collateral, you might see your vehicle or other security repossessed.
What About My Credit Score?
Late installments and collection accounts stay on reports for up to ten years. Each missing payment can intensify the effect on your credit score.
As a result, it might become more challenging to get approved for other financial services. Your interest rates might go up, while job searching could become quite a feat.
However, over time, the impact lessens. Your credit score doesn't go up instantly after you get out of default, but it slowly drops off your file. Practicing healthy financial habits meanwhile can help you rebuild the score.
Preventing Loan Defaults
The essential aspect of avoiding the worse outcomes is realizing you can't meet the agreement terms.
If possible, let the lender know you won't submit the installment before its due date. They might be willing to cooperate in making the situation more manageable.
You could also repay late. Lending offices tend to wait for a while before reporting you to a bureau, letting you avoid credit damage. If your savings don't cut it, though, turning to alternative means becomes necessary.
Consolidating with a short term loan is a good idea, but only if you're sure your financial situation will improve shortly. Otherwise, you might end up deeper in debt than when you started.
If you go for this option, apply for the new financial service before you start missing payments to increase your easy approval chances.
The Bottom Line
Defaults are problematic. They negatively affect your FICO score, potentially harming your financial future. However, they're not the end of the world.
Face the issues head-on, and you'll find a solution with the lending institution, getting back on your feet with few adverse outcomes.