Nobody who gets a loan sets out to default on it, but it’s still important to know what the worst case scenario is before applying. The more you learn about defaulting on a loan, the more effectively you can prevent it from happening. It will also help you to take the loan as seriously as you should. No matter what type of loan you are interested in getting, it is imperative that you learn these things.
What Does it Mean to Default on a Loan?
Defaulting on a loan basically means that you do not pay your loan back in full by the due date. There will be a specific day that your entire loan has to be paid back by. If you fail to fulfill your obligation as the borrower, your loan goes into default. Some lenders are stricter than others when it comes to this. There are certain lenders that consider a loan defaulted on when just one payment is missed. The lender ultimately determines when you have officially reached this point, which is all the more reason to choose one that is flexible and reasonable.
Reasons for Defaulting on a Loan
Most borrowers who default on a loan do so because they are simply unable to pay back the money they have borrowed. This can happen when someone loses their job or becomes unable to work because of illness or injury. There are those who simply refuse to pay back the loan, but this isn’t the most common reason for defaulting on a loan. Some people have other more urgent debts to pay and just get overwhelmed.
How Defaulting Affects Your Credit
There is no question that defaulting on a loan you take out can affect your credit score in a big way. In fact, there are few things that can do more damage to your FICO credit score than this. Late loan payments can also harm your credit, but not nearly as much as defaulting. It can take months or even years to recover from this kind of black mark on your credit report. The better your credit score was before you got the loan, the farther it will sink if you default.
Collection Attempts from the Lender
Just because your loan goes into default doesn’t mean that the lender will stop trying to collect the money you owe. Most lenders such as PaydayLoansOnline.com will make every effort to contact you in any way they can, including phone calls, letters and emails. A lender will never show up at your door, but they are typically allowed to use every other means of contact. Every state has a different law pertaining to this, and it is important to know what yours are. If you are being harassed by a creditor over a defaulted loan, you should know your rights.
A lender may be able to garnish your wages if you fail to pay back a loan that you have taken out. While this isn’t extremely common, it certainly does happen. The more money you owe, the more likely you are to experience this particular consequence. Your wages could be garnished until all of the money you owe has been paid back in full.
How to Keep From Defaulting on a Loan
It is extremely important that you are aware of all the way that you can keep from defaulting on the loans you take out. There are many helpful tips that can significantly increase your chances of avoiding a major hit to your credit.
- Refinance: If you are having problems with paying back your loan, you should consider refinancing. This involves getting a new loan with another lender to replace all of your current debt. You could potentially get a lower interest rate with this new loan, making it easier to pay off what you owe in full.
- Hardship programs: You should also make a point of asking your lender if they can recommend a certain program that might be able to help you out. Some lenders are willing to give borrowers a grace period prior to declaring the loan in default.
- Credit card: You could use a credit card with a 0% introductory interest rate to pay off some or all of the money you owe. Just make sure you pay off your card before the interest kicks in.
Defaulting on a loan is a very serious matter that you need to understand completely. This information should give you a new appreciation for loans of all kinds. If you are planning to borrow money for any reason, you have to keep these things in mind. If you have already defaulted on a loan, try to pay off your remaining balance as quickly as possible to reduce fees and further damage to your credit.