A loan default occurs whenever a borrower fails to repay the money owed to a lender by missing multiple payments over the course of several weeks or months. However, do keep in mind that you can technically be in default even after missing your first payment. It’s just that most lenders will usually give you an opportunity to pay up on your own by waiting some time before attempting to collect it themselves.
This is commonly referred to as a grace period, which means that you can borrow a 255-dollar payday loan on the page of iPaydayLoans and request extra time to repay it without having to incur any late payment fees. However, how much time you are given will usually vary from lender to lender, which is why you should always make sure to choose who you borrow money from wisely.
How Does Loan Defaulting Work?
When someone defaults on a loan, the lender can seek to recoup their money in a number of different ways, which will often depend on whether the loan was secured or unsecured. Secured loans usually require the borrower to put up some form of collateral to secure the funding they need. This means that if they end up defaulting on the loan, the asset in question, be it a car or house, will be repossessed to recoup the debt.
On the other hand, if the loan was unsecured such as an installment loan, bad credit loan, or payday loan, then this means that it was not backed by an asset. In such cases, the lender will charge you high late-payment fees, which will only increase the amount of debt you owe and as time passes, you may be taken to court for the balance.
What’s The Worst That Can Happen If You Default?
Defaulting on a loan can lead to serious consequences, so before borrowing payday loans from iPaydayLoans or anywhere else for that matter, you should take care to review this list in detail.
#1. Damage your credit score
The first impact that a loan default will usually have is on your credit score. Almost all lenders will usually look at your credit report to determine your level of creditworthiness before issuing a loan. When a loan is repaid on time, it can help you to boost your credit score, as it shows that you have a good payment history.
However, if you default on a loan, then your credit score will take a big hit, as it will be reported to the relevant credit bureaus and recorded in your credit report. And since it can often take a lot of time to rebuild your credit score, it is often best to avoid missing a loan payment.
#2. Reduce your lending options
Once your credit score is negatively impacted, it also reduces your chances of being able to secure a loan in the near future, as you will only look like a financial risk to lenders. This only makes it difficult for you to get access to credit when you really need it, which can end up disrupting your financial health drastically.
#3. Lose your collateral
In the event that the loan in question was secured, then defaulting will result in that asset being repossessed by auctioning it off and recouping their dues from the balance of the sale. For instance, if you put up your car as security, then it will be sold off, which can potentially jeopardize other aspects of your life like your job. Another frightening possibility is the debt collector placing a lien on your home, which can prevent you from being able to borrow a home equity loan or line of credit.
#4. Face legal action
As mentioned before, failure to make your repayments on time can result in debt collectors taking you to court to recoup their money. If this happens, you will be forced to show up in court, otherwise, the judge can rule against you. And should this happen, the lender or debt collector will be legally allowed to take the money owed from your paycheck.
#5. Fall into a debt cycle
Another important factor to consider is that the loan interest may continue to accrue the longer it goes unpaid and some lenders may even end up charging late payment fees. If this happens, the debt could balloon to a point where the loan becomes impossible to repay, which leaves you stuck in a cycle of debt that is difficult to get out of. And the end result is that your finances would be affected, which could take you years to recover.
Things To Do Before Defaulting On a Loan
If you have a loan and believe that you may be heading to default because you are having trouble getting the necessary funds together, then the first thing you should do is contact your lender.
This is often the best way to save yourself a lot of trouble and embarrassment because it allows you to discuss with them an amicable way to repay the loan without making the situation any worse. This means explaining to them in detail what the problem is, even if you are completely not confident of your ability to repay.
If the problem is a temporary setback, then the lender may be willing to defer the payments and if the issue is permanent, they may suggest an alternative idea like adjusting the length of the loan. The key is to not avoid the problem because if you do they will assume you are trying to run away from your debt, which only makes the situation significantly worse.
Alternatively, you can consider asking your friends and family for assistance in dealing with the problem and while the experience can be uncomfortable, it can often be your best option. After all, you will not need to pay interest and you can come up with a flexible repayment plan that best fits your current situation, which is preferable to dealing with lenders.
Likewise, there are some employers that have company programs in place to help employees deal with any financial hardship they may be dealing with. You can often reach out to your company’s HR team to find out if this is an option beforehand.
In this article, we’ve summarised that loan defaulting is failing to make the necessary repayments on a debt, which often leads to a number of nasty consequences that pose a threat to your financial safety. It has the potential of lowering your credit rating, halting your ability to secure future loans and even resulting in the loss of your property or wages.
As such, before you get a loan from iPaydayLoans, it is vital that you come up with a plan that ensures you are able to make the necessary repayments on time. A good rule of thumb is to review your monthly earnings and expenses to see exactly how much you can afford to spare on monthly repayments.
This will ensure that you don’t take on a loan that is too big for you to handle, which is what often leads many borrowers to serious problems down the road. And if you do find yourself with a debt that you are struggling to repay, then you should consider visiting a credit counsellor. They can often advise you on the best course of action that will enable you to get out of any debt trap as quickly as possible.