Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The Balance Loans. Table of Contents Expand. Table of Contents. General Loan Default Consequences. Consequences Based on Loan Type.
How to Avoid Defaulting on a Loan. By Justin Pritchard. Justin Pritchard, CFP, is a fee-only advisor and an expert on personal finance. He covers banking, loans, investing, mortgages, and more for The Balance. He has an MBA from the University of Colorado, and has worked for credit unions and large financial firms, in addition to writing about personal finance for more than two decades.
Learn about our editorial policies. Fact checked by Emily Ernsberger. Article Fact Checked August 12, Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information.
Reviewed by Andy Smith. Article Reviewed October 24, Learn about our Financial Review Board. At best, this leads to some awkward Thanksgiving dinners. The last two possibilities—debt collection agencies and private debt collectors—are particularly worrisome. This is a rather unscrupulous industry that often ignores the rules set out in the Fair Debt Collection Practices Act that are designed to keep you safe.
One of the legal tactics that debt collectors have in their pockets is suing you for the debt. In the case of a judgment against you, the debt collector can garnish wages from your paycheck. Another scary possibility is that the debt collector can have a lien placed on your home. This can prevent you from selling it or taking out a home equity loan or line of credit. In some cases, the debt collector can even force you to sell your home to pay off the debt. In this case, you may also want to contact a debt counselor from the NFCC.
They can act as a go-between for you and your creditors to come up with a debt management plan that brings you back on track. Be wary of for-profit debt settlement companies, though, as they may charge high fees and bring unintended tax consequences.
In this case, it can be helpful to consult with a debt attorney, as they can advise you on your options and legal protections. And, if you are sued for the debt, a skilled attorney can help you through that process too. As tough as it is, you can still overcome a personal loan default. Lindsay VanSomeren is a personal finance writer based out of Kirkland, Washington.
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Consequences of Defaulting on a Personal Loan Nothing good can come from defaulting on a personal loan. Your Lender Can Take Your Collateral If you have a secured personal loan , your lender can actually take any collateral you provided to secure the loan.
Is it a temporary set back, or can you not see a way forward for the rest of the loan term? Ask friends and family for support. Make sure you understand how much you owe on the loan and determine how much you need to borrow. If you default, the lender will typically use the collateral to pay off the remaining balance.
Here's what that looks like for different types of secured loans:. In all cases, if the lender doesn't get enough money from your collateral to pay off your debt in full, it may try to get the deficient amount directly from you.
That can include suing you for the amount, which can result in a court order to garnish your wages, a lien on your property and more. In some cases, such as with a car loan or secured credit card, the lender may end up with some money left over after using your collateral to pay off your balance. If this happens, the lender may return the surplus to you. With secured loans, a lender's recourse is pretty straightforward because you pledged collateral when you first applied for the loan, which it could tap if you default.
With unsecured loans, however, it can get more complicated. Here's what to expect from different unsecured loan types:. Again, it's important to note that the timing of default can vary by loan type, as well as by lender.
For example, federal student loan default occurs after nine months of nonpayment, while a private student loan company may consider you to be in default if your payment is late for as little as 30 days.
If you're behind on your payments, loan delinquency and default are two consequences you'll face. Delinquency begins the moment you've missed a payment. You'll typically be charged a late fee, and your lender will begin to make collection attempts. You may be considered delinquent for anywhere between 30 and 90 days—and sometimes longer—before the lender considers you to be in default. When the lender determines you are in default, typically collection attempts begin in earnest, either through the lender's own collection department or a third-party agency.
Defaulting on a loan can not only have serious immediate financial repercussions but also some long-term consequences. When you're delinquent on a loan or credit card for at least 30 days, that late payment will be reported to the credit bureaus and will remain on your credit report for seven years. Once you default, that can also be reported to the credit reporting agencies as a collection account, which can further damage your credit score.
Collection accounts also typically remain on your credit report for seven years. With a default on your credit report, it can be challenging to get approved for credit in the future. That's because a lender's primary concern is repayment, and if your credit report indicates that you've failed to do that in the past, the lender may consider you to be too much of a risk. But that doesn't necessarily mean that you won't ever qualify for another loan. Some lenders specialize in working with borrowers with negative credit issues, and they may offer a loan or credit card at a higher interest rate.
Also, it's important to keep in mind that credit scoring models typically favor new information over old information.
So if you can manage to establish a positive payment history going forward, the effects of your default can diminish over time.
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