What does it mean to Default on a Loan?
No one ever intends to fall behind on their loan payments, but it happens. You may lose your job or suffer a medical emergency, or there may be an emergency with a child. Whatever curve life throws at you, it can severely impact your finances, preventing you from keeping up with your monthly loan payments. Before this does happen in your life, it’s important to learn about the consequences of defaulting on your loan and what you can do about it.
When You Default, What Happens Next?
The answer to that question often depends on the type of loan. For instance, a secured loan was insured with collateral, such as the equity you own in real estate or a vehicle. In the case of defaulting on a secured loan, the bank will likely take possession of the collateral. Personal loans, on the other hand, are unsecured, so defaulting on this type of loan won’t risk the loss of property. Instead, the bank will most often file a report to damage your credit and may take legal action to recover the loss.
Home loans are especially troubling, because the bank can foreclose on the property, which means you’ll be forced out of your home. The property will then be sold for the balance of your debt. If the bank can’t recover everything you owe, you may still be held liable for the difference.
Auto loans are very similar in that the bank will likely repossess the vehicle and sell it at auction. If the automobile sells for less, you may have to cover the difference. In terms of auto loans, both a bank offering the original loan or an institution granting a title loan have the authority to repossess the vehicle.
Defaulting on student loans won’t risk your property, but they’re worse in that they will likely follow you for years to come. It’s almost impossible to get rid of a student loan through bankruptcy and, if you do default, the Department of Education will probably garnish your wages. Additionally, the IRS may withhold refunds, using the money to pay your debt and you will receive less money at retirement from social security.
What Can You Do, After You Default on a Loan?
Your first step in avoiding negative consequences should be to call your lender immediately. By contacting them as soon as possible and explaining your situation, they may work out a repayment schedule. This can help you avoid foreclosures or repossessions.
Lenders would rather work with you than reclaim property or report you to a collection agency. It’s better for you and it’s better for them. Typically, a foreclosure or repossession is a last effort, after the individual has failed to communicate with the lender. As long as you show your interest in working the situation out, they will be more accommodating.
Even if you don’t have the money to pay, you should still contact the lender. When someone avoids communication attempts, the bank often assumes that individual had no intention to pay. By talking to the lender, you’re likely to get a new payment schedule, forbearance, or some other considerations.
If your debt has already been submitted for collection, all of your correspondence should be with the collection agency. In this case, you should ignore phone calls. Only correspond via registered mail with a returned receipt, so there will be a paper trail for all communications.
In summary, sometimes people fall on hard times, but that doesn’t mean they can’t recover. By working with your lender, you can often avoid negative consequences and earn a second chance. The important thing is to work at it, before things go too far and you find yourself facing the loss of property or unsettling legal actions.