Life can be full of surprises. We never know what will happen next, especially when it comes to our finances. You might be one of those people who lost their job due to the coronavirus pandemic. Or you might have unexpected expenses that need immediate action.
If you are struggling to repay one or more loans because of these or similar situations, it is vital to know what you are getting into and how you can prevent your debts from spiraling out of control.
What Happens If You Don’t Pay?
The worst-case scenario is that if you stop paying for a loan, you will be in default. This means you will owe more fees, penalties, and interest charges on your account. Besides that, your credit score will also be impacted negatively, and might take several years to recover.
Some accounts go in default even after a single missed payment. Other accounts can also go in default after a series of missed payments. This will depend on the loan type and lender.
In most cases, a loan in default tends to be sold to a third-party collections agency or sent to the lender’s collections department. Moreover, having a loan in default might also result in your tax refund or wages being tarnished if the lender takes you to court.
There are also unique circumstances linked to certain types of loans in default. Suppose you defaulted on your federal student loan. The result is you might not be eligible for an additional federal payment student loan, alternative repayment plans, or federal loan options like deferment and forbearance.
Another example would be an auto loan. This type of loan is a secured loan, which means there is collateral involved. If you default on an auto loan, the lender might repossess your vehicle.
Loan Defaults and Credit Score
Derogatory marks, including collection accounts, late payments, and defaults will likely stay in your credit reports for about 7 to 10 years, be it from a Single Payment Loan or an Installment Loan. Even one late payment reported can lower your credit score. Continuing to miss more payments can worsen the situation.
Having a low credit score means you will struggle to get approved for other financial products. This might also lead to higher interest rates on credit cards and loans. Moreover, derogatory marks might also affect your job search.
Paying off the debts that are in default or sent to collections could help your scores and reduce your overall debt. However, the marks will not come off your credit reports any sooner. Although that is the case, still, you will no longer have any debt to think of. And, lucky for you, these marks will certainly reduce over time.
When You Realize You Can’t Pay, Do This
You might still have time before your next payment is due. If that is the case, it would be best to take action before you are officially late on loan payments. At this point, you still have some options such as:
- Pay Late
It would still be best to make on-time loan payments. However, if you can’t do that, it is recommended to pay slightly late rather than really late. You should do whatever it takes to get your payment to the lender within 30 days of the due date.
- Consolidate or Refinance
It will help if you consider consolidating or refinancing. If you consolidate or refinance with a personal loan, you might end up having lower interest rates and lower monthly payments required. Besides that, a new loan most likely gives you more time to pay.
It would be best to apply before you start missing payments. This is because most lenders don’t approve a borrower who is already behind. You can choose to apply for an unsecured loan with a bank, credit unions, and online lenders.
Applying for these loans and making on-time payments can minimize the damage to your credit. You can use a financial calculator to understand how your payments and total debt might change with different interest rates. Doing so will help you know which lender has the best offer.
- Try Secured Loans
You can opt to consolidate with a secured loan if you are okay with pledging collateral. However, it is vital to know that this involves the risk of losing your asset. If you put your vehicle on the line, it might get repossessed if you fail to make payments. This is also true if you pledge your house, as you might lose it in foreclosure.
- Communicate with Lenders
If you foresee some challenges in making payments, try talking to your lender. They might have the solution you are looking for. Some lenders are open to changing the due date or will let you skip payments for a few months.
Other lenders might even let you negotiate a settlement. You can explain to the lender that you can’t make any payments, offer less than what you owe, and see if they accept. However, your credit will suffer if you choose to settle. On the bright side, you put your loan payments behind you. It can also help if you let them know about some low cost ideas you have to supplement your income.
Take Action
One way or another, we will all experience some financial problems. When it comes to not being able to pay for your loans, it is best to take action as soon as possible. Doing so would help minimize the damage it would cause to your finances.