When you take out a personal loan, you agree to a set monthly payment. It’s a binding contract that you have to meet, or you risk entering default. That might not sound serious, but it can have significant consequences.
What is Personal Loan Default?
Every personal loan lender has their own terms and conditions that determines when your payments are officially late and when you enter into default. For some lenders, you have 30 days to make a payment before you enter default. With others, you enter default just one day after missing a payment. If you’re not sure what your default day is, check your loan paperwork.
4 Ways Defaulting on a Personal Loan Could Hurt You
When you fall behind on your payments and enter default, there are serious repercussions, including:
Loss of assets: If you took out a secured loan — meaning you had to put up valuables, like your home or car, as collateral — and enter default, the lender can seize your assets and take your valuables.
Late fees: Lenders can also charge you late fees, which can add hundreds, or even thousands, to the cost of your loan.
Collections: The lender can send you to collections, which means a collection agency can call you every day at home or at work to collect what you owe. If you continue to be in default, the collection agency can get a court order against you and even garnish your wages.
Ruined Credit: When you enter default, the lender will report your status to the three credit reporting bureaus: Experian, TransUnion, and Equifax. The late payments will wreck your credit score, making it more difficult for you to get approved for a car loan, home, or even a new apartment.
How to Prevent Entering Default
Once you’re in default, it’s hard to dig yourself out. If you’re in danger of falling behind on your payments, it’s important to take action right away:
Ask for help: If at all possible, consider asking friends or family for help so you can make your loan payment. It might be embarrassing, but it’s better than ending up in collections.
Contact lender: Some personal lenders, but not all, offer forbearance if you are facing a financial hardship. That means you can postpone making payments for a set period without entering default. If you think you’re in danger of missing a payment, contact your lender right away to see if you qualify.
Raise money fast: If you’re short on cash, consider raising the money you need for your payment by selling things around the house, such as furniture, clothes, or electronics. Or, pick up a side job to earn extra money.
Debt settlement: Depending on your situation, you might be able to negotiate your debt. When you settle your debt, the lender agrees to accept a lower amount than you actually owe. Your lender is under no obligation to accept a settlement, but if they review your finances and see that you will be unlikely to afford the payments going forward, they may agree to cut their losses.
Consolidate your debt: If your current payment is too high for you, you can potentially avoid default by consolidating your debt with a new personal loan. When you apply for the new loan, you can opt for a longer repayment term, which can reduce your monthly payments and make them more affordable. If your credit isn’t great, you will likely need a cosigner to pursue this option, but it can be a smart way to avoid default and prevent falling behind in the future.
Managing Your Debt
Falling behind on payments can cause a lot of problems for you, so it’s important to be proactive and take action right away if you’re in danger of missing a payment. By reaching out for help, you might be able to get more time to get your finances in order.
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