If you have a loan default, it means that you have a halt in making loan payments. What does it mean for you as a borrower? Well, nothing great. In fact, it can hurt your credit and allow a lender to contact credit bureaus. So, if you think that a miss in payment will occur in the nearest future, find out your potential options.
Indeed, things happen and none of us is safe from the worst-case-scenarios. And when you feel that you may default on a loan, take preventive actions.
According to research findings, for 54 percent of respondents, those loan defaults were due to loss of employment. For 20 percent of respondents, the reason was in multiple loans acquired.
Want to avoid the risk of getting a substantial and lasting drop in your credit score? Good news: it’s time to contact your creditor.
Loan Default Definition
Loan default is a disability to repay a loan on time as stated in the contractual terms.
A borrower typically struggles to pay a loan when his/her profits are too low to cover the required sum. As a result, this inability to make payments on time will result in loan default.
Important to note, that after failing to make a single payment on time, you won’t default. Yet, the point at which the loan default happens varies between lenders, contracts, and types of loans.
That’s why it’s extremely important to carefully read your contract before taking out a loan.
What Happens When You Default on a Loan
When you take out a loan, chances are you have a plan on how to pay it back on time. Indeed, things may have changed in the blink of an eye and the situation goes completely out of your control.
Have you carefully read the contract terms? It’s in your own interest to learn how much and how many missed payments for a certain amount of time will make you suffer.
The fact is that some lenders will take action after one missed payment, while others will wait for months.
Anyway, lenders will contact you in as little as 30 days after a missed payment. So, if you have let a loan slip into default, don’t let this communication become more aggressive. Chances are you don’t want to face potential loan default consequences that may lead to the property loss and lawsuits.
So, once you feel that you may skip a payment, hold the horses and cool down. Who knows maybe it isn’t likely you’ll be able to get caught up on your loan payments anytime soon.
Take time to carefully think about what can happen if you default on your loan. Don’t wait until serious financial consequences strike you, instead, improve your situation right away. Remember that you’re not alone.
What Happens If I Close My Bank Account and Default on a Payday Loan
You may think of closing your bank account like a great deal. Chances are you hope to stop the lender from taking money out of the account. Well, you’re wrong. When you close the account, that doesn’t always mean that’s the end of it.
In fact, closing the checking account will not stop the lender from withdrawing money from your account. As a result, you’ll end up accumulating more and more overdraft fees from the bank every time the lender tries to get money from your account.
Now imagine! You have other accounts at the bank. The lender can debit these accounts for the amount being processed through the closed account. Don’t have any other accounts? That’s not the way out. The payday lender will try to contact you to set up alternate payment arrangements.
If the lender can’t contact you, it can still pass your case to the debt collection agency and you’ll end up with even more additional fees. Depending on the amount defaulted, the collection agency can sue your case in a civil court for failing to repay the payday loan. So, now you are subject to garnishment with no solutions to your problems.
At last, if you close your account in one bank you may not be able to open another account at a different bank. As a rule, most banks will not allow you to open a new account in their establishment while you still owe money in another bank.
What Does Default on a Loan Mean?
Now you know that having a loan in default typically means not paying it back as determined by the contract loan agreements.
Once you commit your default status and its consequences, it’s time to understand how it can affect you. Regardless of the cause, the adversely affect is sure to come. Get ready for the damages in your credit score and not always polite communication with the debt collection agency.
These are some important factors to remember here:
- Some loans are immune to bankruptcy.
- Never ignore the loan if you can’t afford it.
- It’s impossible to make the loan disappear.
What Is the Loan Default Rate?
For personal and business loans, the loan default rates vary. As a rule, the level of defaults on business loans is lower, because of the higher eligibility standards.
Feel the difference.
To get you up to speed, at the end of 2018, defaults on business loans reached 0.94 percent of borrowers. At the same time, consumer loans defaults made up 2.34 percent.
Anyway, with the default personal loan, your credit score will suffer. The best thing here is that both defaults are easy to avoid. Everything you need is to actively contact your lender.
Once you make the first steps in loan consolidation, it’s your chance to get out of default with minimal financial consequences. Of course, it all depends on the size of your defaulted loan. In case you’re too overwhelmed with your debt obligations, you’d better contact a debt counselor to help you find an easy way out.
What Are Your Options for a Loan after Default?
Without a doubt, a loan default can make you struggle. If you don’t want to lose property or face any legal action, take care of your loan payments.
One thing to remember here is that you’re not alone who struggles to repay a loan. Even though the reasons vary, communication with the lender is key.
As the old saying goes, prevention is better than cure. So, take control over your loan payments before the situation escalates. Every time you need help, professional debt counselors are ready to get your head back above the water and keep your credit score in tip-top shape.