Did you know that most Americans live paycheck to paycheck because they are captured by debt?
Debt is one of the main reasons why people default on a personal loan. This leads to more debt and finding other ways to pay it off. Simply speaking, the cycle never ends.
Is defaulting on a loan such a bad thing? Read on to learn all about it.
What Does Defaulting on a Personal Loan Mean?
When you default on a personal loan, you are behind on payments that you agreed to make. If this happens, the lender takes steps to recover the money that you owe.
A loan default occurs after you miss your initial payment, but a lender usually waits until you are a few months late before enforcing the default provision. The moment that the default occurs depends on the loan agreement terms.
What Happens When You Default on a Personal Loan?
A default on personal loans can lead to negative consequences such as lost wages and a lower credit score.
Yet, you still have power when you default on a loan. For example, you can find people who are willing to help protect you under the law.
If the lender completed UCC filings, the debtor has the right to UCC terminations. This will help lessen the complications that come with defaulting on a loan.
The following are some consequences that occur when you default on a personal loan:
Hurts Your Credit Score
As mentioned above, your late payments can lead to a negative impact on your credit score. This occurs before you are considered to be in default.
A drop in your credit score can happen quickly, but the recovery process takes much longer. When you have a bad credit score, it’s harder to get a job, buy a house, or rent a property.
You might be able to get approved for another loan, but it will come with a high-interest rate.
Your Collateral Gets Taken
If you provided collateral to secure the loan, the lender can take it away when you default on a loan. If your car or savings account was used for collateral, your lender can repossess those things.
Your Wages Will Garnish
Among being harassed by debt collectors, you might have to face more serious consequences when defaulting on a loan. Debt collectors use legal tactics like suing for the debt to receive their money.
If this occurs, you’ll go to court and a debt collector might garnish wages from your paychecks. It is also possible that a debt collector will place a lien on your home.
Don’t Default on Your Loan
Nothing good happens when you default on a personal loan. However, it is easier said than done not to default on a loan when you come across hard times.
If you think you are close to defaulting on a loan, you can talk to the lender, ask people for support, and seek credit counseling. Although the only way to avoid delinquency is to pay on time, these tips might help.
For more articles about personal finance, check out the other posts on our blog.