Defaulting on a loan means failing to meet your obligation to repay money lent to you according to the terms of the agreement. This status and its consequences can affect borrowers of all kinds of loans and can be made worse by a variety of factors, including:
- Some loans are unaffected by the bankruptcy
- You can’t just ignore the loan if you can’t afford it
- You can’t make loans disappear
What is Defaulting?
As stated above, to default on a loan means failing to adhere to the terms of repayment. Depending on the terms, this could be as simple as being late on a payment or missing a single payment, or it may be due to refusing to make any payments. Regardless of the cause, the effect of a default severely damages your credit score and allows collectors to contact you.
Why is Missing a Payment Bad?
The day following a missed payment is when your loan to is considered delinquent. This continues as long as it takes for you to pay to make the loan current. Lenders will report any delinquencies to the credit bureaus. Missing payments is not something you want to get in the habit of and if you’re already behind, you should seriously consider debt consolidation or debt settlement program. A bad credit history can make it difficult to:
- Get a cell phone
- Get utilities
- Get home insurance
- Be approved for an apartment
- Get a mortgage or auto loan
- Get a reasonable interest rate on any line of credit
Consequences of Defaulting on a Loan
If you are one day late paying a bill, you have defaulted on your loan. With personal loans and credit cards, you may be granted a 30-day grace period to repay a missed payment. After that, however, you’ll start to see late fees and possibly even a sharp increase in interest rates. If another 30 days pass, collections calls will likely begin to make contact as your account enters default status. By six months following a missed payment, the bank will most likely charge-off your account from its books, though this doesn’t relieve you of the burden; more likely, a collections agency will purchase the account and attempt to collect it instead. Now comes a collector who is financially invested in finding and collecting from you, which means the calls will likely increase in frequency.
Eventually, this charge-off will end up at an attorney’s office, and the attorney may elect to issue one last letter requesting payment, or else you may end up in court. You may end up legally ordered to repay the original debt along with other fees. At this stage, the default is public record. This means that if you were to apply for a new job, employers could learn of your default status on your bills and decide not to hire you.
Why You Need to Avoid Defaulting on Your Loans
As mentioned earlier, not all debts can be discharged, even if you attempt to file for bankruptcy. Along with student loans, you can’t simply wish away debts on taxes, alimony or child support. Some of these are possible to renegotiate, but in short, defaulting on any loan is going to have a negative effect on your credit score.