When you take out a mortgage to buy a house or get some other type of loan, you make a promise to pay it back. When you don’t pay it back on time and fail to live up to that contract’s terms, you default on the loan.
As you might expect, defaulting on such a serious obligation isn’t viewed in a positive light. Now let’s dive deeper into the topic to see why you should avoid having a default on your record at all costs.
The Consequences of Loan Defaults
Almost any loan you take will be attached to a contract. This legal document binds you to specific terms, and when you sign it, you agree to those terms.
A closer look at the contract should reveal the consequences of not doing as promised. Most of the time, those consequences equal legal action taken against you that can put you in a financial bind in both the short and long term.
Here are some examples of the consequences that come with defaulting on a loan as a consumer:
- Late fees
- Negative reports to bureaus that can decrease your credit score
- Collection procedures
- Wage garnishment
Should your situation become dire enough, any combination of the above could cause you to file for bankruptcy. You could also lose tax refunds and see smaller social security payments in the future if you default on one particular type of loan, which we’ll discuss shortly.
In short, a loan default puts a massive dent in your reputation as a borrower, making it harder for you to find financing years down the road. This can reduce your flexibility when it comes to buying things you need, and it can increase how much you pay out of pocket for specific items.
Defaulting on Personal Loans
You could lose your home if you default on a mortgage. The lending company or bank can file a Notice of Default to evict you and foreclose on the house if you can’t bring your payments up-to-date.
Being evicted does not completely get you off the hook, either. You can still be liable for expenses that arise from the process, such as if the home is sold for less than the loan’s value.
Defaulting on a student loan can haunt you to retirement since it can result in losing tax refunds or lower social security payments.
Luckily, many student loan lenders will work with you to come up with options to manage your obligation should you lose your job, have no income, and more. Before letting your student loan default, talk with your lender to let them know your situation.
Missing car payments can result in repossession. As with a mortgage, losing your car doesn’t completely get you off the hook.
If your vehicle is sold at auction for less than what you owe, you’ll have to pay the difference and any other expenses. If you don’t, you will likely face legal action.
Defaulting on Credit Cards
Miss one credit card payment, and you will have to pay late fees. Miss two minimum payments, and your annual percentage rate (APR) will increase. A report or your delinquency will also be sent to the three major credit reporting bureaus, which can negatively impact your score.
Beyond the financial punishments, your peace of mind will be impacted via collection calls. If you reach the 90-day point without paying, you may receive a settlement offer from the credit card company.
If you don’t accept the company’s offer and six months pass, a loan default will occur. From here, the company can turn your account over to a collection agency. Your credit score will suffer, and you may be sued.