Life happens, and sometimes that can mean being unable to fulfil all your financial commitments for the month. But failing to make payments on your personal loan on time can have severe negative effects on your credit score, future borrowing capability, and overall future financial situation. Let’s explore the consequences of defaulting on your personal loan and what you can do to remedy the situation.
I’ve Defaulted on My Personal Loan, What Happens Next?
In the 30 days following your personal loan payment deadline, you will be issued a notice of late payment by your lender. There is likely to be a penalty fee or interest applied to the overdue amount.
Your lender may contact the credit bureau regarding your failure to honour your credit agreement if the multiple attempts made to contact you regarding the outstanding amount are unsuccessful. This can happen after 30-60 days following your payment deadline. This will negatively affect your credit score and will be noted on your credit report for up to seven years following the incident.
If you have still not made any payments towards your personal loan or come to a resolution with your lender following this, your debt is ‘written off’ by the lender. This does not mean that you no longer have a debt to pay off. Rather, your debt collection is handled by a third-party collections agency. At this point, legal action may be taken against you.
To avoid blemishes on your credit record and possible legal action, it is best to contact your lender as soon as possible to discuss the situation. Lenders are more likely to be open to resolving the issue if you are upfront about why you have defaulted on your personal loan.
Effect on Your Credit Score
Defaulting on your personal loan payments will undoubtedly harm your credit score. Your credit score provides an indication of your credit risk to future lenders, landlords, and other creditors.
Note that lenders usually only notify the credit bureau of loan defaults 30-60 days after the payment deadline. This means that you may be able to reduce the negative effects on your credit score by responding to your lender to resolve the matter.
If the matter is resolved through legal proceedings, your lender will have to notify the credit bureau. The incident will be recorded on your credit report for up to seven years.
Future Borrowing Capability
Lenders are less likely to approve loans for people with undesirable credit scores and blemishes on their credit records. A low credit score is an outright indication that you have not been able to manage your debt previously and pose a high credit risk.
A credit score of 610 is ideal, especially if you are considering taking out a secured long-term loan such as a home loan. Anything below a credit score of 610 is considered undesirable, with scores of 300-499 being considered extremely poor.
Legal Repercussions of Defaulting on Your Personal Loan
After a few months, your lender is likely to sell your debt to a third-party debt collection agency, and this is where you can expect to face legal repercussions for defaulting on your personal loan. Legal proceedings are a last resort, and you will be given the opportunity to enter a payment plan depending on what you can afford before it comes to this.
The legal repercussions will vary depending on the severity of the case. You are responsible for the legal costs incurred by your lender or collections agency, including costs if you are eventually taken to court over the matter. Your case will be heard by a magistrate who will then pass judgement.
In certain cases, the magistrate may allow your lender or collections agency to garnish your earnings or possessions in order to ensure your debt is paid off. This means that your employer is legally obligated to withhold a percentage of your salary from you. This money is paid directly to your lender or collections agency. Alternatively, the Sheriff may be instructed to seize assets of equivalent value to your debt and legal fees.
How Do I Avoid Defaulting on My Personal Loan?
If you anticipate being late on an upcoming personal loan payment, here are four things you can do:
- Seek professional financial advice
- Borrow money from family members or friends
- Dip into savings
- Contact your lender
In the long term, there are a few things you can do to avoid defaulting on your personal loan:
- Make a note on your calendar of payment deadlines
- Reconsider your budget to maximise savings
- Consider debt counselling
It is also important to initially choose a personal loan that you know you can afford to repay. When deciding on a loan, it is wise to do your research and consider all available options. Find the loan that suits your lifestyle and budget, so you can grow that credit score and stay stress-free.
Did you know that there’s a quick and easy way to request personal loan offers from trusted NCR-registered lenders? Simply head over to the BetterLoans personal loans page to browse interest rates, fees and other lender information.
