11/9/2022
The financial situation is a phenomenon of many ups and downs for most people. Sometimes you will have the liquidity to meet your commitments, but there will be times when you may not be able to and have to resort to personal loans.
However, before you take one out you should know that if you default on a personal loan, the consequences could affect your reputation beyond belief.
What does it mean to go into loan default?
No matter how hard we try to look good and be responsible, circumstances could play against us. The reasons that lead us to default on a personal loan are varied and this situation can lead to various unfavorable consequences.
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That is why we will first try to understand how default or non-payment works.
Whether it is due to forgetfulness, too many debts, job loss or illness, default is the result of a series of delays over a certain amount of time.
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Keep in mind that default will depend on the terms of the contract, but it usually happens this way:
- When it is an unsecured loan, you have one month to pay the respective installment. If you go 30 days past the allotted date and then default within the grace period (10-15 days), you start incurring late interest or a penalty.
- After 60 days of non-payment, you may be charged interest on the balance or a late payment fee.
- After 90 days of the same behavior, the collection department will have noticed that you are not paying, so you are assigned a default status.
- After 120 to 180 days, your account is considered uncollectible and is removed from the records. Since you still owe the money, the lender may turn to a debt collector or sell the account to a collection agency.
What are the consequences of not repaying a personal loan?
When you default on the terms of the contract and fall into loan default, it can affect you in several ways. In addition to the fact that your behavior will be reported to the 3 credit bureaus, other consequences could be:
Application of extra fees
Although there are lenders that offer no-fee personal loans, most have a policy of charging you a fee if you are late with your monthly payments. It is also common for them to charge you a fee every time they attempt to unsuccessfully withdraw funds from your account.
This becomes a NSF (Non-Sufficient Funds) or what is known as a non-sufficient funds fee. These late payment fees can be an additional interest, a flat fee or a percentage of the balance. Generally, an NSF represents a one-time fee and can cost you $15-40 USD.
Negative impact on your score
The most significant damage when you are unable to repay a personal loan is the impact on your credit score. As you take longer to repay, the situation can worsen dramatically.
In fact, missing a single payment can represent a drop of 100 points or more, so if you keep this up, your good credit could end up being very bad.
If you have 750 and drop to 650, the impact is much more negative, making it more difficult to get financing opportunities. On the other hand, if you drop from 650 to 550, the difference will not be so noticeable when applying for credit.
The problem is that non-payment will also affect other areas of your life, such as utilities, getting a job or even buying a cell phone.
Legal problems
According to the law, not repaying a personal loan can have certain legal implications, although this does not mean that you will be thrown in jail.
If you refuse to pay in the face of letters, notices or insistent calls from collectors or the collection agency, they have the right to file a lawsuit against you.
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When this happens, the first consequence will be a negative record on your credit file for being in court proceedings, which remains for 7 years.
In case you lose the lawsuit, they can garnish wages or levy a percentage (25%) of your income or levy your bank account until you finish paying. This will depend on state regulations and the court's ruling.
How do I avoid a loan default
If you are about to default, we recommend that you talk to your lender to try to resolve the problem. You can also turn to your employer to negotiate a pay advance or to family and friends to bail you out.
But if you're already in default, try paying the late installments plus fees, negotiate a lump-sum arrangement or use debt consolidation.
The consequences of not repaying a personal loan can haunt you for years, complicating your credit situation. To prevent this from happening, rely on our Busconómico comparator and our personal finance specialists.
Español: Consecuencias de no devolver un préstamo personal