How to deal with a personal loan in default
While taking out a personal loan from a lender, you need to sign an agreement and promise that you’ll repay the loan timely. But, due to some reason, if you fail to make payments on time, or didn’t make the payments at all, your loan might be considered as defaulted.
You might become a personal loan defaulter immediately after missing your monthly payment or months later. It may depend on your loan terms, and the state or federal laws.
Practically, a personal loan can be taken out as a debt consolidation loan if you can get low-interest rates, and several other benefits. But if you knowingly or unknowingly default on that loan or you are unable to make regular payments, it can be very harmful to your finances. Sometimes people ignore the late payment notices, and sometimes they can’t receive it as they have shifted their home without updating their current address to the lender.
Loan defaults are a common scenario these days. For example - as per the U.S. Department of Education, 10.1% of students having federal student loans in 2016 had defaulted within two years. And as per the Federal Reserve Bank of St. Louis, 2.61% of commercial banks’ credit cards had defaulted during the fourth quarter of 2019.
What is a personal loan in default?
A personal loan can be considered as default when a payment is late by 30 to 90 days. However, the actual time frame might depend on the lender, the type of loan, and the terms of your loan agreement.
Personal loans can be called delinquent, but it can’t be called defaulted if a payment is made within a few days gap after the due date. You might be charged a late fee after exceeding the grace period of 10 to 15 days. The late fee amount may vary from $15 to $40 or a percentage of the due balance.
The lender will report the late payment to the credit bureaus only after you exceed 30 days from the due date. Due to the late payments, you may lose as much as 100 points from your FICO credit score while having an excellent score from 690 to 850.
Apart from that, defaults may stay on your credit report for up to 7 years. As a result, you may face difficulties to qualify for new credits.
What will happen if you default on a personal loan?
Once you have defaulted on your debt consolidation loan or the personal loan, your lender might sell your unpaid loan to recover their money. Initially, they prefer to appoint their in-house collection department to deal with the matter. But later, they may sell it to a third-party debt collection agency. The debt collector might call you regarding your unpaid debt, send you mails, e-mail or text, to recover the debt. The lender or collection agency may take legal actions against you and take you to court. If the judgment goes against you, then you may have to repay the loan through wage garnishment, or a lien will be placed on your asset. Many lenders may allow you a 15 or 30-day grace period to make your late payments..
You might have to pay an additional fee if you do not make payment longer than 60 days. You will be charged an additional interest rate even with the best debt consolidation loans. If you do not pay more than 90 days, your account will be officially considered a default.
What you should do if you default on a personal loan?
a) Contact a lawyer
It is better to consult a lawyer if you have a personal loan in default. If the lender or collection agency filed a lawsuit against you, then you must seek legal help.
You’ll need to appear in court to avoid a default judgment. In this situation, a judge resolves the case and automatically the judgment goes in favor of the lender or debt collector.
b) Know your rights
You should consult your rights under the Fair Debt Collection Practices Act (FDCPA). Check the laws if you face default or if a debt has already entered collections.
Debt collectors can’t use illegal methods such as abusive language, unfair demands, or deceptive offers to collect their debts. A debt collector can’t harass you or threaten you verbally or through any medium of communication. If he does, you have the authority to file a complaint with the Consumer Financial Protection Bureau and inform your grievance to your state’s attorney general.
c) Know your rights
You may call the lender before the due date of the next monthly payment. The lender may give you some time to recover from the issue. He can give you a temporary suspension or deferment of loan payments if you explain your situation.
You might also get relief from being charged a late fee. But, some consequences are still there. The interest rate on your loan will gradually increase, and so will your total monthly payment amount.
d) Contact a credit counselor
A credit counseling agency can help you to prepare a solid repayment plan. A credit counselor will work with you and help you to create a new budgeting plan. He/she also helps you to free up your money to make the personal loan payments. This way you may stay current on your debt consolidation loans.
e) Consolidate or refinance personal loan
You might have taken out the loan to consolidate your debts. But what will you do if you can’t pay off this debt also? You might have taken out the loan to save money from credit card interest payments. But in the end the actual debt balance will remain the same. So, you should also think about consolidating this personal loan or refinance this loan to lower interest costs and a lower required payment. If you take out another loan to pay off this loan, it will give you more time to repay.
You should apply for a refinance loan before you miss monthly payments on your existing personal loan. You should take out the money before getting default on other existing loans. If you don’t, the lenders may review your credit report and reject your application, as then you are already behind on your payments.
You may apply for a new loan with banks and credit unions. I would suggest you to not apply for a cash-out refinance loan or a payday loan.
f) File for Bankruptcy
Filing for bankruptcy should be your last resort to get out of debt, and it should only be considered when you have no other logical option to pay off the loan. Bankruptcy does have few benefits, but also it can harm your credit score. Filing for bankruptcy may create issues depending on your job profile, and may even create issues in your personal life too.
Defaults may affect your credit negatively; as a result, it may also affect your ability to take out loans or any other credit lines in the future. Having communication with the lender often proved beneficial in this case. Face the issues directly, do not avoid or ignore lender calls. You may definitely be able to find a resolution that’ll work for both parties.