While no one tries to default on personal loans, the truth of the matter is that unexpected circumstances can make it impossible to make your next payment. Luckily, there are preventative measures you can take to decrease your likelihood of defaulting on your loans. We’ll walk through what’s classified as a ‘default’, what happens if you default on a personal loan, and what steps you can take to minimize negative consequences of a default.
What is a Default on a Personal Loan?
It’s important to note that defaulting on a personal loan is not the same as making a late payment. Typically, defaulting is when you fail to make your repayment within 30 days of the due date, though this number varies depending on the lender and state/federal laws. Many personal loan lenders give a 10-15 day grace period, and some don’t even consider your account delinquent until there have been several missed payments in a row.
What Happens if you Default on a Personal Loan?
Whether intentional or not, there are severe consequences if you default on a personal loan. At Helix, we do not take legal actions against non-payments. We do, however, sell accounts to third party collection agencies in some cases. These agencies may have the means to affect your credit rating and take legal action (ie: take the case to court, wherein wages or tax refunds may be garnished). This is typical of most personal loan companies, though some may conduct this collection process internally rather than through a third party.
Note: Since most personal loans are not secured, you don’t have to worry about your home or car being seized as a result of a default.
The most harmful effect of defaulting on a personal loan is that your credit score will drop once reported to the bureau. Your credit report takes into account derogatory marks (ie: late payments, collection accounts, defaults, etc.) and uses this information to judge whether you’re a trustworthy borrower. These negative marks can stay on your report for 7-10 years and prevent you from being able to get approved for other financial products. You might also be saddled with higher interest rates if you are approved.
If you know that you aren’t going to be able to make your next payment, call your lender and explain the situation. In some cases, they’ll extend your repayment period to give you more time to save up money.
If you’ve already defaulted, the next step is to pay off any accounts that have been sent to collections or are in default. You may need to ask friends or family for money, but it’s worth it to avoid any hits on your credit score. Once paid off, you may see your score go up, since your overall debt is reduced. However, it will not make the marks disappear from your record any sooner, so you want to take as many preventative measures as possible to keep defaults from happening in the first place.
Here at Helix, we want all of our customers to succeed, so we always make sure that we educate our borrowers on what they need vs. want before they even apply with us. Going into default and damaging your credit score is not something to be taken lightly, for it follows people around for almost ten years! Whether we are your personal loan lender or not, be sure to communicate and take care of your financial health. If you want to learn more about the process and how to get a personal loan, take a look at our website and explore our personal loan application page.