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What happens if I default on a loan?
What it means and what to expect if you can't pay off your loan.
A loan default can be expensive and sometimes does serious damage to your credit. But being informed can help you get back on the path to financial wellness. We break down what a loan default means, its consequences and what to do if you’re about to miss a payment or already have.
When and how does a loan default occur?
It depends on your loan type, lender and the terms of your specific term agreement. Many personal loan contracts consider you to have defaulted on your loan 30 days after you miss a repayment. Some give borrowers 60 or 90 days before it’s considered a loan default.
To know your loan’s specific terms for default, check your loan contract or contact your lender.
What happens if I miss one payment?
Your loan won’t necessarily be in default if you’re late and you might not even have to pay a fee. Many lenders offer a grace period before a late payment charge kicks in, typically around 10 to 15 days.
After that, you’ll be on the hook for a fee. According to the Ministry of Law’s regulations, moneylenders are only allowed to charge a maximum fee of S$60 per month of late repayment.
5 consequences of a loan default
From legal action to harassment from debt collectors, here are five things that might happen if you don’t make that repayment within 30 days of its due date.
1. Additional fees
Most lenders charge late payment fees, even providers who claim to offer no-fee personal loans. Additionally, you could be charged a returned cheque fee each time your lender unsuccessfully attempts to withdraw funds from your bank account.
If you think you’re going to miss a repayment, you might want to stop automatic repayments. That way, your lender won’t try to unsuccessfully access your bank account and you’ll only pay a late fee.
2. Lower credit score
Your repayment history is one of the most important factors in your credit score. In fact, the moment a credit provider classifies your loan as a default, the CBS will reflect this information on your credit report.
More than 2 late payments will start bringing your score down, and a default can stay on your credit report for over seven years.
3. Harder to qualify for future credit
Having a loan default on your credit report tells a lender that you might not be creditworthy. It often takes at least 3 years after you’ve settled the loan post-default before you may be considered for a new loan. Even so, having a bad mark on your credit report can make it difficult for you to qualify for competitive rates on most types of financing.
4. Lose collateral or risk legal action
Thought you’d save on interest by taking out a secured loan? That collateral is no longer yours once you default on your loan.
If you default on an unsecured loan, your lender will move to the court for a settlement. Since personal loans are largely unsecured loans, legal actions may lead to having your bank accounts seized. If you have no means to pay for the settled sum, you may also risk having one or more of your assets repossessed by the lender.
In the worst case, you may end up having to file for bankruptcy. This would clear you from any responsibility of repaying the loan.
5. Loan tenure extension
Many lenders also extend your loan tenure by as many instalments as you skip. On top of late payment charges, a tenure extension would increase the total amount you pay back to the lender.
Worried you might default on your loan? Here’s how to avoid it
Fortunately, there are steps you can take to preventing a loan default. If you think you’re going to miss that next repayment, you might want to do some or all of the following:
- Contact your lender. Calling or visiting your lender in person might be the fastest way to alert your lender that you might have trouble making a repayment. Many are willing to work with borrowers that think they might default by adjusting your loan term to lower your repayments or taking other steps to make sure you don’t miss a repayment.
- Ask your family and friends. In times like these, your social safety net might come in handy. Explain the situation to a relative you trust and ask if they can help you out.
- Talk to your employer. Some companies might be willing to give you a pay advance if you’re in a tight spot with a lender. Ask your human resources department what your employer’s policy is for advances.
- Talk to a credit counsellor. Struggling with your personal finances in general? A local credit counselling agency might be able to help you get back on track and strategize about how to avoid missing the next repayment.
Already in default? Here’s what to do next
The sooner you can get out of default, the faster you’ll be able to start building your credit. While that negative mark will stay on your credit report for at least seven years, you can start taking steps to regain your financial health right away.
- Pay your late payment and fees. Just missed the cutoff for late payments? Try to pay off that late payment and fee before it goes to collections. If you let it sit too long, your lender could sue you for repayment.
- Look for a debt consolidation plan if you’re about to default on loans with multiple lenders. By combining your loans under a single lender with lower interest, your repayment problems can get a lot more manageable.
- Negotiate a settlement. Already in collections? You might be able to negotiate your debt down to a large one-time payment. You can do this on your own or hire a debt settlement company to do it for you — though you’ll want to make sure you’re working with a reputable organization.
- Get credit counselling. Credit counselling can also help after you’ve already experienced a loan default by helping you come up with a debt management plan for paying off your loan and staying out of debt.
A loan default can have serious consequences that follow you around for longer than even seven years and should be avoided at all costs. No matter if you’re about to default or already have, it’s crucial to take action as soon as possible. Aside from the fees and the potential legal consequences, the longer you let your loan sit unpaid, the more you’ll owe in interest.
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