Consequences of not paying back a personal loan

It doesn't matter if it's countries or people, the financial situation is a phenomenon of many ups and downs for most. Sometimes you will have liquidity to meet your commitments, but there will be times when you may not be able and you will have to resort to personal loans.

Article content

1. What does it mean to enter into loan default or loan default?
2. What are the consequences of not paying back a personal loan?
3. How do I avoid defaulting?

However, before hiring one you should know that, if you stop paying a personal loan, the consequences could affect your reputation beyond what you thought.

What does it mean to enter into loan default or loan default?

As much as we try to look good and be responsible, circumstances could work against us. The reasons that lead us not to repay a personal loan are varied and this situation can lead to different unfavorable consequences.

That is why we will try to understand first how the default or non-payment works.

Whether it's due to forgetfulness, too much debt, job loss, or illness, default is the result of a series of delays in a set amount of time.

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Keep in mind that the non-payment will depend on the conditions of the contract, but it usually happens like this:

• When it comes to an unsecured loan, you have one month to pay the respective installment. If you miss 30 days of the assigned date and then do not meet within the grace period (10-15 days), you start to incur late interest or any penalty.
• After 60 years of not paying the debt, you may interest rates rise regarding the balance or apply a late payment commission.
• After 90 days of the same behavior, the collection department will have noticed that you are not paying, for which they assign you the status of default or non-payment.
• After 120 to 180 days, your account is considered uncollectible, being removed from the records. Because you still owe the money, the lender could go to a debt collector or sell the account to a collection agency.

What are the consequences of not paying back a personal loan?

When you breach the terms of the contract and fall into loan default, it can affect you in a number of ways. Besides that your behavior will be notified to the 3 credit bureaus, other consequences could be:

Extra commission application

Although there are lenders that offer personal loans without commissions, most have a policy of charging you a commission if you are late in your monthly payments. Also, it is common for them to charge you every time they try to withdraw funds from your account without success.

This becomes an NSF (Non-Sufficient Funds) or what is known as insufficient funds commission. Are fees Late payments can be additional interest, a fixed charge, or a percentage of the balance. Typically, an NSF represents a one-time fee and can cost you $ 15-40.

Negative impact on your score

The most important damage when you cannot repay a personal loan, is the affect your credit score. As you take longer to pay, the situation can get dramatically worse.

In fact, losing a single installment can represent a drop of 100 points or more, so if you continue like this, your good credit could end up being very bad.

On the assumption that you have 750 and go down to 650, the impact is much more negative, making it more difficult to find financing opportunities. On the other hand, if you fall from 650 to 550, the difference will not be so noticeable when applying for a loan.

The problem is that delinquency will also affect other areas of your life, such as services, getting a job or even buying a cell phone.

Legal issues

According to the law, not paying back a personal loan can have certain legal implications, although this does not mean that you will be locked up in jail.

If you refuse to pay in the face of insistent letters, notifications or calls from the collectors or the collection agency, they have the right to file a lawsuit against you.

When this happens, the first consequence will be a negative record in your credit file for being in a judicial process, which remains for 7 years.

In case you lose your mind, they can seize you a percentage (25%) of your income (garnish wages) or apply a collection from your bank account until you finish paying. This will depend on state regulations and the court ruling.

How do I avoid reaching default

If you are about to default, we recommend talk to your lender to try to solve the problem. You can also go to your employer to negotiate a salary advance or with family and friends to get you out of trouble.

But if you are already in default, try paying back fees plus commissions, negotiate a one-time settlement, or resort to debt consolidation.

The consequences of not paying back a personal loan can haunt you for years, complicating your credit situation. So that this does not happen, rely on our Business Blog comparator and our specialists in personal finance.