What Happens if you miss a Payment or Default on a Loan?

Many people actually want to get a loan but do not know the consequences of missing the repayment. Getting a loan can be a pretty hectic process of course. When you finally do get the loan and unfortunately get into a position where you cannot meet up with your payments on time or default, well, there are consequences.

Defaulting on a loan is when you miss multiple successive repayments and the lender seeks to end the loan agreement and requires the return of the full outstanding loan in addition to any other fees not forgetting the interest.

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This is definitely a serious issue as it will have an effect on your credit score negatively and may end up with the lender initiating court proceedings. I believe you don’t want to be in such a mess.

When you are repaying a loan, you are actually paying back the money you previously borrowed from a lender or any lending platform. During the borrowing process, some agreements and arrangements on how this money should be paid are already spelled out.

The return of funds happens through a timely payment which includes both the principal and interest. The principal here means the original amount of money you borrowed in a loan. The interest depends on the agreement which is like a charge for the privilege of borrowing money.

Know that as a borrower you will be expected to pay a certain amount for the money loaned to you. Now, the question is what happens if you miss a loan? Of course, there are consequences.

Consequences of Missing Loan Payment

Here are the things that could happen when you miss a loan payment:

1.  You will receive a warning message

Taking a loan is a serious issue. It is something you should consider properly and then come up with a means of keeping up with the payment, maybe weekly or something. When you miss a loan payment, there is usually the warning phase from your tender may be through email, letter, or some other means.

This warning comes with the need to make the repayment and probably any charges you may have incurred due to missing payment(s). This charge can include interest charges and additional fees for late payment.

If you are already involved in a financial situation these charges can push you to a bigger financial problem.

2. Your Credit Score will be Negatively Affected

Even if you miss only one repayment, missing or forgetting your due date of payment has a negative way to affect your credit score especially, if you are working hard to build a good credit score history for yourself.

It is very risky, to start with it makes it more difficult to take out a difficult loan in the future. On another hand, a damaged credit score will lead to issues that range from not being accepted for credit applications to missing out on securing a mortgage for a new home.

3. You will be Charged with a Late Fee(s):

When you fail to make your payment by its due date, you might be charged a late fee. Depending on the lender, the amount of the fee can vary and be influenced by the type of loan, the amount remaining, and how long the payment remains outstanding.

Refer to your signed loan agreement for details on how much you will be charged as a late fee payment.

 4. You can run the risk of default rate or penalty interest rate.

For instance, if your interest rate is 18% for a one-time payment, you could be charged up to 29.99% interest for that time.

The lender may choose when to impose the penalty rate, which may occur one day, 30 days, or 60 days after the due date.

5. Court Action:

The lender can charge you to court when it is clear that your loan is in default. If a court ends up with a decision going against you, you will have to end up paying a lot more than the repayment you missed.

Other fees will also be added on top, do not forget that the court will also add its own expenses plus additional interest, leading you to further debts. All of these will affect your credit rating because it will be reported to the credit agencies and it will be recorded on your file.

However, people have different reasons why they miss out on loan repayment. It could be from a family emergency or loss of income due to tough times that came out of the bubbles. Let’s consider what to do to avoid missing loans.

How to Avoid Missing Loans

1.  Call the lender:

Call the lender and explain why you may miss a payment on the due date. Take responsibility, by doing so and presenting your case, they may have payment options available that can help you get your account back on track.

After this, do your best to pay off the overdue amount quickly. If you need help coming up with the funds, look for ways to make income. If you pay early, you avoid the extra charges and fees that may be added.

2. Automate your payment:

You can set out some amount maybe from paycheck or side hustles, that goes straight to the account meant for repayment that way you don’t miss out on payment even if you want to forget.

With an automated repayment method, your debts are in check and updated once the amount is set up for it. You can do this by linking your loan account and your savings account, for an auto-debit transaction.

3. Set up an Automated Reminder

Set up a reminder on your calendar that helps you remember your monthly or weekly installment. It is like paying a credit card every month.

4. Avoid taking another loan to pay a loan

Your credit score is already at stake here. You don’t want to make it any worse, hence avoid using debt to pay another debt because you might not be able to cope.

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5. Ask for help from your Employer

If you are struggling to pay off a loan, you could try asking your employer for an advanced payment if possible. Check your employer’s policy if they have this option.

How Long Before a Loan is Considered to be in Default?

Once you are 30 days late to your repayment, your loan is already considered to be in default. However, this depends on your state, some states consider loans to be in default when it is up to 90 days, which in most cases are student loans.

A default occurs when a borrower stops making the required payment on a debt. It can occur on secured debt such as a mortgage loan secured by a house, or unsecured debt such as credit cards or a student loan. Default exposes borrowers to legal action.

However, defaulting on a personal loan means your monthly repayment is already 30 or 90 days over due. Default not only damage your credit score, but they also stay in your credit report for up to seven years and can make it harder to qualify for new credit.

Consequences of defaulting on a loan

Of course, there are consequences when your loan is over due which obviously becomes a default.

Here are the consequences of defaulting on a loan:

1. Acceleration: the entire unpaid balance of your loan and any interest incurred becomes immediately done, which spells out the problem.
2. You can no longer receive a deferment or forbearance, and you lose eligibility for other benefits which include the ability to choose a repayment plan.
3. The default is reported to national consumer reporting agencies, damaging your credit score rating and affecting your ability to buy properties.
4. Your tax refunds and federal benefit payments may be restricted and applied toward the repayment of your default loan. In this case, it is termed “Treasury Offset”
5. You may be charged to court, collection, attorney fees, and other costs associated with the collection process.
6. You will run the risk of taking years to re-establish a good credit record. Since your credit rating is already affected. This possess a serious problem for you.
7. Worst case scenario, you could go to jail, depending on the less of your debt.
8. There could be threats of repossession: if you miss several repayments in a row, you are totally in a mess of the threat of repossession of any of your property. It could be your car or house. You might also have to face the original lender. They can pass your debt onto a specialist debt collection agency and this can lead to further trouble. In a case of secured debt especially when you secured the loan with your car or house, such property can be repossessed by the lender.

What do you do when faced with a loan default?

 1. Contact the lender:

Be responsible enough to call the lender before your next payment so that the lender may be able to provide some relief may be as a temporary suspension or deferment of the loan payment.

It is better you go meet the lender first and clearly explain your situation, maybe a family emergency is a problem or a rough month, whatever the case may be, go to the lender first before your loan goes to default.

2. Understand your rights as a debtor:

the fair debt collection Practices Act (FDCPA) helps you with this knowledge if you are facing a default already entered collections. If you know your right, you will understand that the collector is wrong to use abusive, unfair, or deceptive ways to collect on debts. It is considered illegal. If you file a complaint when you feel harassed or abused by the collector for breaching the loan.

3. Get a lawyer:

At this point, you already need one especially when you are being served a lawsuit. You have to seek legal help as the next line of action.

In other to avoid a default judgment, you need to appear in court. It is left for the judge to resolve the case and automatically rules in favor of either the lender or you, the debtor.

 4. Consider talking to a credit counselor:

You should consider talking to a certified credit counselor who can give you steps or strategies and a plan of action to help pay off your loan and get out of debt, recover your score and get back on the financial track.