Wouldn’t it be nice if all your debts were paid off? When trying to figure out how to eliminate debt, it can be tempting to take out a loan to pay everything off. If you take out too big of a loan and can’t repay it, however, you’re at risk of defaulting on your loan. Defaulting basically means you’ve failed to pay what you are contractually obligated to. Depending on the type of loan you took out, the lender can take action against you in a number of ways. Often your loan contract might state that legal action will be taken against you and detail how exactly that will affect you.
Automobile or Title Loans
With an automobile loan, you are in the process of paying off a car you’re already driving. With title loans, you’re using your vehicle as collateral to secure the loan. In either case, the lender might repossess your car and sell it to help recover their funds. Repossessed cars are often sold at auction, sometimes for less than they’re worth—which means losing your vehicle might not even fully pay off what you owe!
You bought your home because you love living in it. Don’t risk losing it because you defaulted on a loan! If you default on your mortgage, the bank can force you out of your home and foreclose (sell it to recover their money). Even if you are evicted and the home is sold, you could still be forced to continue paying the lender. For example, if the home is sold for less than the amount you owed. To avoid defaulting on your mortgage, you could try refinancing, which could potentially help you pay less each month. While it has become harder to qualify after the housing crisis, a variety of programs to help homeowners struggling with debt, exist.
If you default on a student loan, the repercussions could follow you into retirement. Luckily, there are many options available to help students having trouble paying theirs off. If you have a private loan, you could try to consolidate the debt. You can also look into deferment due to unemployment or economic hardship. While there are time restrictions on deferment (three years at the maximum), it can mean a period of time where you don’t have to make payments. You’ll still owe just as much, but you’ll have a little more time. If you don’t qualify for deferment or you know your time of financial hardship is only temporary, you can try forbearance. Forbearance is similar to deferment, but it is only for a 12-month period and is at the loan servicer’s discretion—they’re not required to let you suddenly press pause on your payments. You could also look into refinancing, negotiating lower payments, or entering an income-driven repayment plan. While many federal student loans are regarded as more borrower-friendly, defaulting on these can result in the IRS withholding your tax return or the Department of Education garnishing your wages.
The repercussions of defaulting on a personal loan can depend on the type and your lender. Defaulting on unsecured loans, or loans without collateral, can result in wage garnishment or litigation to receive a lien against company earnings. The lender could also get a collections agency involved or take you to court and ultimately seize any assets if the judge rules accordingly. Your credit score will definitely be affected.
After you miss a couple of payments (usually 60 days without paying the minimum due), expect to see your APR rise, in addition to late fees. Now, not only will you owe the balance on your cards, but you’ll owe increasingly more in interest and fees. Soon, your card will report you to the major credit bureaus and your failure to pay will show up on your credit history, lowering your credit score. The credit card company might offer you a settlement, or might send your account to a collections agency. Depending on the amount you owe, the company could sue you or pursue repayment until you declare bankruptcy.
Payday loans aren’t so much about defaulting on a loan as paying higher fees as a result of the rollover. When you take out a payday loan, you usually agree to pay back the borrowed amount plus the (usually very high) interest within a very short timespan. If you can’t, you pay off just the interest accrued and borrow the same amount again—with yet more interest. This is usually referred to as “rollover” or reborrowing. Unsurprisingly, over 80 percent of payday loans are the result of reborrowing, according to the Consumer Financial Protection Bureau. A payday lender will happily let you reborrow the debt as many times as you want—pocketing the interest every time as your debt grows.
As you might have concluded by now, defaulting on a loan generally ends in a lower credit score, lots of fees or higher interest payments, the risk of legal action, and potential loss of property. It’s best to avoid defaulting on a loan when at all possible. Communicate with your lender to let them know when you’re having trouble making payments. After all, they’re probably happier with lower payments than missed ones! If you’re not sure what to do, it could be good to speak with a licensed credit counselor to decide your next step.