Sometimes things don’t work out as planned. You probably intend to pay off all your loans, but life can surprise you in many ways – a job change or health event can quickly knock you out. So, what happens in those worst-case scenarios? Lastly, you can “default” to your loans, and it’s important to know how it affects you, your finances and your loans.

What happens when you get default?

What happens when you get default?

Not surprisingly, borrowing a loan comes with consequences.

The specificity depends on your situation (such as the type of loan, described below), but you can usually count on the detriment of your loan and the additional cost.

Credit and legal issues: Your credit will fall when you fail to make the necessary payments. For the first 30 days after payment, you are probably in the clear. Subsequently, lenders report missed payments to credit bureaus, resulting in lower credit scores. Lower grades make it difficult to credit in the future, and a low credit score can affect several other areas of your life. For example, you may have a harder time renting, getting a job, getting helpful and mobile phone services and buying insurance.

Finally, unpaid debts can be sent to collection agencies. Collections damage your credit, can lead to legal judgments against you, and can be expensive. As things progress, lenders may be able to wind up their paychecks or even take assets from their bank accounts.

High Costs: To make matters worse, your financial burden is likely to increase unless you set up a loan. Subsequent fees, penalties and legal fees can all be added to your account, increasing the total amount you owe.

Types of credit

Types of credit

Depending on the type of loan you are referring to, different things can happen.

  • Loans secured: If a loan is secured with collateral like your home or car, the lender can potentially take that property and sell it.
  • Personal Loans: For unsecured loans (which have no collateral attached), lenders can only damage the loan and try to collect by taking legal action.

Home Loans: If you bought or refinanced an apartment with your loan (or borrowed it with a loan line of credit or another mortgage), your lenders will be able to force you through foreclosure and sell your home to collect the loan balance. If the sale does not cover the entire amount you owe, you may still owe the difference or “deficiency”, depending on state laws.

Cars: Car loans are similar. If you are in charge of a car loan, the vehicle can be returned and sold. Again, you may owe any downside if the car is selling for less than you owe (which can be due to rapid depreciation, or if you somehow collapse on credit). Repossession is possible for the original loan you used to buy the vehicle, as well as for any loans you took for extra money.

Student Loans: Student loans allow you to repay using different options and possibly even delay (or “defer”) payments when you fall into difficult times – but you usually lose those options when you default on student loans.

Also, student loans are seriously difficult to handle in bankruptcy. Federal student loans are relatively favorable for borrowers, but if you are in charge of these loans:

  • The IRS can withhold tax refunds to pay off debt.
  • The Department of Education can very easily ease your paychecks.
  • You may receive lower Social Security payments.

Credit Cards: Credit card deferral is probably a painless debit, but your credit will certainly fall and your account will likely be sent to the collection. Expect to see additional fees for your debt, and collection agencies will make endless phone calls and other collection attempts.

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