When taking a personal loan, it’s never the intention that the repayments will become challenging to manage. Most people strive to make the repayments fit comfortably with other financial obligations. 

 

In fact, many people commonly resort to these financial solutions to consolidate debt, so their finances are much more manageable. But what happens when not one unfortunate event strikes but perhaps a few in a row? Life circumstances can snowball with a run of bad situations happening over a while.

 

That can result in maybe one missed payment or perhaps a few. Before you realize it, there’s a delinquent note on your account. What can you do when you’re in default? What are the options? Can you refinance the loan in your current situation? 

 

Please visit here to learn more about refinancing when there’s a note on the account. Let’s look at what it means to default on a personal loan and how you can handle it.

 

What Does Defaulting On A Personal Loan Mean

 

Defaulting means that payments have stopped, whether you missed one payment on a loan or have fallen behind by a few. Delinquency will turn into default based on the loan type, the financial institution, and the contract. These will also determine the consequences of the default.

 

In some situations, a loan provider will charge a substantial late fee, for which the details will be outlined in the loan contract. It could result in a percentage of the repayment or a flat fee. 

 

The loan contract will give further details on the follow-up action the loan provider will take to collect its funds. Lenders usually have extensive costs when pursuing collection, which benefits you because it causes them to drag out the default process. Still, the provider’s goal is to recover the loss. Go to https://www.valuepenguin.com/loans/what-does-it-mean-to-default-on-a-loan/ to learn the details on defaulting loans.

 

Can You Avoid A Default With Your Loan

 

If you’re struggling with your monthly installment with a fear that you might miss a payment or have the potential for default, there are paths to avoid having a payment note put on your loan. 

 

• Reach out to the loan provider

 

As a priority, it’s wise to reach out to the lender to discuss your current financial situation. All creditors want their debt repaid. That means the goal is to work with you to find the most practical solution that will result in you making some sort of monthly repayment towards the balance.

 

The last thing the lending agency wants is for the loan to go into default. Some providers will offer “short-term deferments” meant to give clients a brief break from their loan obligation, but the caveat is that the borrower has to sign on for an extended term.

 

This isn’t the lender’s “first rodeo.” Other people struggle with life circumstances, with lending agencies needing to become creative with different options to ensure the balances are repaid. 

 

The priority for you as the borrower is to find out whether the resolution will impact your credit and if it will affect the overall loan cost.

• Refinancing with a new personal loan is a viable option

 

If your credit hasn’t been affected, you can stay ahead of the game by checking out the possibility of refinancing before you default. By taking a new personal loan, you can arrange for more favorable terms than the arrangement you currently have.

 

The opportunity is also available to consolidate the existing loan with other debt for a single monthly repayment making expenditures more manageable. The goal is to break away from the struggle into a more comfortable circumstance. 

 

If you merely refinance without changing much from the current situation, you’ll end up back where you are, only this time, the default might be unavoidable. Are there ways to avoid default, read here.

 

What Happens If You Can’t Avoid Default

 

You might be at a point where a missed payment gets by. In order to catch that up, essential monthly obligations would suffer, meaning you won’t be able to catch up; default is inevitable. That doesn’t mean there’s no recourse or you can’t get back on track.

 

Everyone has legal protections available to them, with the option of reaching out to debt counselors (not for profit) to serve as a mediator between the creditors and you for managing the outstanding debt. After a significant period of time, debt collectors can no longer sue, but the stain will stay on your credit for a while.

 

Debt attorneys can advise your stance and discuss protections if you get sued, helping you navigate the legalities. What consequences should you anticipate as the result of a default? Click for details on what happens when you default on a personal loan. 

 

• A new loan or credit will be difficult to obtain 

 

While you will want to refinance, it will be challenging with a payment note on your account. That doesn’t mean it’s impossible. Some lenders, even your own, might allow the option if it means repayments will be made. 

 

Instead of doing an entirely new loan, the creditor will often opt to rework the current loan to make it more manageable for you to repay.

 

• Your credit score will be impacted

 

Even before you’re officially labeled as defaulting, the lending agency will report late and/or missed payments to the credit bureaus, negatively impacting your score. The state of our credit previous to your struggle and the amount of time your delinquent will dictate how great of an effect you’ll see.

 

FICO studies indicate having a home loan roughly two months behind can cause a “130-point drop in credit scores and will take nearly seven years to recover.” A lower-than-average credit score can affect an entire lifestyle since landlords use the criteria, universities, employers, insurance carriers, and on. 

 

Even if you could obtain a loan, something that would become very difficult, the products would be exceptionally costly.

 

• The lender can seize assets

 

If the loan you default on is secured, you risk losing your assets. The provider has legal rights to seize property and sell it to recover their loss. If it’s a home loan, your home can go into foreclosure, or an auto will be repossessed.

 

• The potential for being sued for the debt

 

In the same vein, as a loan provider can legally seize assets for a secured loan, the lender can also sue a borrower in default on an unsecured loan to recover the loss. Wages can be garnished, and a house can have a lien placed on it. 

 

You will need to appear in court to speak for your hardship, or the judge can automatically judge in favor of the lending agency. With a judgment, the debt collector can initiate garnishing your wages with your employer and have the option of speaking with the mortgage company to place a lien on your house. 

 

If that step is taken, you’ll be unable to sell or obtain a line of credit or home equity on the property. There are cases where debt collectors have forced borrowers to sell their properties to recover the debt.

 

Final Thought

 

Defaulting a loan is never a good idea if you can avoid it. If you have a payment, not on a loan, reach out to the loan provider to see if there’s a way to either renegotiate the existing terms and conditions to make it less of a struggle for you to make the repayment or perhaps refinance, maybe consolidate.

 

That might be challenging when you’ve proven incapable of making payment, being a significant risk, but it’s not impossible. Loan providers ultimately want their balances repaid. And you still have the opportunity to turn things around by showing you’re willing to make amends with a new loan. 

 

The worst thing to do is to avoid paying and bypass the lender. Nothing good can come from that.