Defaulting on a loan basically means that you miss a repayment or fail to pay the full amount that is required each month for your loan, for a period of so many months. Usually, if it’s the very first time you’ve missed a payment, you will find that you simply get a warning from your loan provider that warns you that you need to make up for the payment that you have missed, and that you will need to take steps to avoid missed payments in the future. However, remember that if you have a hire purchase for a car or a secured loan, then the provider may threaten to take away your home or vehicle in an attempt to recover their costs.
If you default on a repayment, your loan provider can take your debt and pass it onto a debt collection agency, or they may choose to take court action. In secured loans, they can even take away the property that is tied to your debt. On top of all of those problematic events, the missed payment will also show up on your credit report, which could significantly reduce your chances of being approved for credit cards and finance I n the future.
Importantly, you may also end up being in arrears if you miss your loan payments, which means that you owe more interest than you did before. The less you pay back to your provider, the more the interest on your debt will accumulate. There may also be a fee for missing your repayment.
Do you Really Need to Miss a Payment?
If you’re worrying about money and you feel that you might not be able to make a debt repayment, it’s important to keep calm and be careful about the hierarchy of debts that you need to deal with. For instance, if you have unsecured and secured loans, the secured loans are the ones that you should avoid missing repayments on first.
Defaulting on any loan is likely to lead to very problematic consequences like perhaps having a debt passed onto a debt collection agency, or moving into a position where you will be taken to court. For people who have a loan that is secured, items may be repossessed to make the payments that you have missed. You will also receive negative marks on your credit score which could severely impact your future.
If you cannot repay your debts after an extended period of time, then you may have to consider other options in your finances, such as filing for bankruptcy. Crucially, this is not something that should be considered lightly as you may struggle to apply for a loan ever again after you are deemed to bankrupt.
One route to avoid bankruptcy is to use an individual voluntary arrangement, which is an option that exists between the loan provider and customer which agrees to freeze interest and therefore cut down the amount that has to be repaid. While this has a negative impact on your credit score, it’s generally much less damaging than bankruptcy.
How Not Repaying your Loans Impacts Credit Score?
Ultimately, failing to repay your loans has a significant impact on your credit score. Not only does it show up on your credit report, but it also shows other lenders and loan providers that you might approach in the future that you may not be trustworthy enough to give credit to. Any missed payment shows that you cannot be trusted with debt, or that you cannot be relied upon to make the payments that you are asked for in time, or in full.
Though you might think that getting a loan isn’t a big deal, if you have any plans to get a credit card, apply for a car loan, or even get a mortgage in your future, then your problems with repaying loans could make it impossible to do any of those things. Additionally, if you ever want to consider debt consolidation, your access to different consolidation options will be restricted.
Should You Consolidate your Debt?
If you’re concerned about loan repayments and you want to make sure that you’re equipped to pay off your debt, debt consolidation can be a good solution. If all other avenues for budgeting have failed, debt consolidation could be a solution, though you may find that you need to pay more than you would if you could simply pay your debts as standard. Just remember that debt consolidation loans should be considered very carefully.
A debt consolidation loan works because the provider essentially pays the debts that you owe, then you will need to repay them in a more flexible repayment plan. Even with debt consolidation loans, you will be expected to keep up with repayments.