The Consequences of Defaulting on a Loan

The Consequences of Defaulting on a Loan

People take out a loan for a host of different reasons. And yes, people also default on their loan obligations for various reasons. Depending on the particulars of someone’s circumstances, defaulting on a loan is unavoidable. Others may be outright negligent with their financial manners. They just choose to stop paying. Failure to pay back a loan is not something that should be done lightly under any circumstances. Defaults come with serious consequences.

Losing Collateral

Defaulting on collateral loans means the collateral ends up being seized. The potential to lose the collateral is known from the very beginning. Assuming all problems go away once the collateral is seized is incorrect. The default shows up on a credit report.

A Damaged Credit Score

The most immediate result of a loan default would be damage to one’s credit score. Timely repayment of debt is logged on a credit score. A default is going to bring down a credit score significantly. Anyone who runs a credit check is going to be staring at notes on the default. This does not exactly create a positive impression in anyone’s mind. Unless the default is settled, the negative marks on the credit score are going to remain for seven years. Seven years is a long time for that dark cloud to swirl over a credit report.

Financial Ramifications

Once a credit score reports a loan has been defaulted upon, the following should be expected when seeking further lending:

  • Offers with much higher interest rates.
  • No loans without the borrower putting up collateral.
  • Limited options of lenders willing to work with the borrower.

Simply put, someone who does not pay back a loan becomes a “bad credit lender”. Finding any decent loan offers from a traditional lender is going to become a lot harder if not impossible.

Lingering Effects

A loan default and the resultant impact on a credit score hurts more than just future lending options. Credit checks are routinely performed when trying to lease an apartment or being hired for a job. The default could ruin a lot of golden opportunities. Regardless of the reason why the loan went into default, there will be unforeseen consequences.

Recovery Attempts

With personal — unsecured — loans, the lender is not exactly going to let someone owing thousands of dollars just walk away easily. The loan obligation is sure to be turned into a collection service. This means steps end up being taken to recover the funds. If the collection agency is not successful, the lender may choose to engage in civil action. In other words, the lender might opt to file a civil suit to recover the money owed. Once a judgment is levied against the defendant, a lien might be enforced to recover the funds. Yes, things do get very complicated quickly.

Lawsuits and liens end up on public records. Public records are sure to be a source of embarrassment for years.

Filing for Bankruptcy

Escaping from collections and legal ramifications might require filing for bankruptcy. Bankruptcy is not something anyone should take lightly. While debts might be discharged or settled, a credit score would be devastated by filing for bankruptcy. And bankruptcy comes with its own dark, haunting cloud.

Working Out a Resolution

Lenders do not want to deal with defaults. Often, the lender will work something out with the borrower to avoid a default. Lowering a minimum monthly payment amount or deferring collection for 90 days are two possible options. Before defaulting, discuss things with the lender. See if an alternate solution that appeases all parties can be reached.