What Actually Happens When You Default On A Loan?
When you take out a loan, you sign a contract that says, essentially, you promise to pay the money back or … something bad will happen. Typically the “bad thing” is some combination of legal action and/or repossession of property. If you don’t pay back your loan, you will eventually enter what’s called default.
Default literally means “a failure to fulfill an obligation”. In the context of a loan, it means you’ve failed to repay the money you borrowed as promised. The most common types of loans that people have are:
- Credit cards
- Car loans
- Student loans
So what really happens if you default on one (or all) of these types of loans? While everyone’s circumstances will be slightly different, here’s a general idea of what you can expect:
Credit Card Default
Credit cards are the most common tool people use to borrow money and build a credit history. If you default on your credit cards, several bad things can happen fairly quickly. Once you stop making payments, the bank that issued your card will:
- Start charging you late fees each month
- Raise your APR (interest rate)
- Lower your credit score
- Report your failure to make payment to the major credit bureaus
Good credit history is essential if you want to be able to get other kinds of loans, so defaulting on your credit cards can ruin your chances to get a car loan, student loan, or even a mortgage later in life. In the worst case scenario, you can be sued and/or forced into bankruptcy if you don’t settle your credit card debts.
Car Loan Default
Most car loans fall into a category known as “secured loans.” This means that there are physical assets that the borrower has offered to provide if he or she fails to repay the loan. In the case of a car loan, your car is the asset that secures your loan. This means that if you don’t make the payments, the bank or dealership can take the car back.
Having your car repossessed can be very humiliating and inconvenient. Once your vehicle has been repossessed, it will be sold at auction. If your car sells for less than what you owe on it, you will have no car and still have to make payments on the remaining balance.
Student Loan Default
Millions of people are currently struggling with student loan debt in the United States. Student loans come in two varieties: public and private. Public student loans are loans given by the government. Private loans are offered by various lenders who specialize in student lending.
Defaulting on a public student loan can result in the government garnishing your wages (money is taken from your paycheck each month) to tax refund levies (any tax refund you get will go towards repaying your loan).
If you default on a private student loan, the results are very similar to credit card default. If you can’t settle with the lender, they may take legal action against you to try and recover the money you owe them.
How To Avoid Default
The best way to avoid default is to have a clear budget and a solid financial plan in place at all times. If you’re struggling with debt, consider speaking with an experienced financial professional who can help you get back on track.
At Miles Brown, we work with clients at every stage in life to help them make smarter financial choices. To learn more about how we can help you, please contact our offices today to schedule a free consultation.
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