“Consequences of Loan Defaults”


To “default” is to fail at repaying a debt – including principal or interest – on either a loan or security. They usually happen when a borrower cannot make payments on time, they regularly miss payments, or they avoid making payments. Alternatively, they stop altogether. As one might expect, there are consequences for such an act.


Credit damage


Falling into default will mean that your credit will suffer greatly. Your credit score consists of numerous factors, but the most critical is your payment history. This includes your current position with outstanding accounts, credit cards, loans, or other lines of credit. Having a bad credit score will obviously negatively affect you in various ways. It can make it harder to rent or buy a house and get a job, among other tasks. Even if you get the approval for a loan, a poor credit score can make it more pricey.


Some lenders will report delinquencies if you are late paying a bill. During the first 30 days after a due payment, you might be okay. However, missed payments resulting in default will be reported to credit bureaus, which in turn will lower your credit scores.


Legal problems


When all else fails, lenders will send any unpaid debts to collection agencies. Collections can negatively impact your credit and provoke legal judgments, not to mention be quite expensive. In some cases, debt collectors can be an annoyance to deal with.


Defaulting is considered to be a civil crime, not a criminal crime. Therefore, arresting defaulters isn’t something that the police do. That being said, the defaulters are accountable for paying off the debts. When it comes to court judgment, lenders could potentially garnish your wages or even go so far as to seize your bank account’s assets.


An increase in costs


Defaulting can boost your debt amount. Not only that but various things may be added to your account, thus increasing the total balance. Such things that could be added include late payment fees, penalties, and legal costs.


In actuality, taking the effects of compound interest into account, outstanding debt increases rather quickly. By missing payments, the charges of your monthly interest are added to the principal balance of the loan. From this, future interest is charged on this greater balance, and so on. As you can probably tell, this can snowball very quickly.


What to remember


As you can see, the consequences of loan defaults of any type are harsh and one should avoid them at all costs. The best thing to do if you miss a payment or your loan remains in delinquency for just a few months is to contact the company responsible for managing your loan. Loan servicers will often collaborate with debtors to create a payment plan that both parties can benefit from. Otherwise, in the worst-case scenarios, leaving a loan in delinquency and causing it to default can result in your assets or wages being seized.