Defaulting on a loan means you’ve missed payments for so long that you’ve broken the payment contract with your lender. This can apply to student loans, personal loans, credit cars, auto loans, mortgages, etc. Basically, any loan you take out can be in default if you stop paying. Defaulting on your loans has serious and lasting consequences, but not all defaults are created equal.
Student loans are one of the worst types of loans to repay. They won’t just go away after you’ve paid penalties and your credit suffers. They usually cannot even be wiped out by bankruptcy. If you default and try to run away from what you owe, the money can still be taken from you through the IRS, wage garnishment, or Social Security. Yes, your student loan provider can still sue you when you are of Social Security age.
Pro tip: If you find yourself in a bad financial situation and unable to pay off your student loans, you don’t have to default! Call your student loan provider and tell them what’s going on. There are ways to reduce your payments or defer your payments until you are able to pay. This is a much better approach than not paying at all.
If you default on a home loan (also known as a mortgage), your lender won’t just penalize you with fees. A mortgage is considered a “secured loan,” which means that there is something the lender can take back from you if you stop paying. In this case, it means that your bank may force you out of your home through foreclosure if you stop paying your loan.
Once a house is foreclosed, it is then sold so that the lender can get the money back. Unfortunately, if the house sells for less than you owe it, you may owe the difference. So even if your house is foreclosed and you are forced to leave, you still might not be off the hook.
Auto loans are similar to mortgages in that they are also “secured loans”. In this case, if you do not pay your car payment, your car can be repossessed by the lender.
The car will then be resold and you will again be responsible for any money still owed on the original loan. This is especially likely in the case of a car repossession, as cars lose value very quickly (often as soon as you leave them!).
A personal loan is considered “unsecured” because there is usually no collateral deposited in exchange. This means that the bank cannot physically take anything from you if you don’t make your payments.
However, the lender can penalize you with late fees and increased interest rates. They can also send your unpaid debt to collections and / or sue you for the balance. This means that you risk paying more money than you should have in the first place, and your credit history will suffer.
When you don’t pay your credit card, the consequences may not be immediately serious. The bank will charge a late fee and after missing 60 days of payments your APR will increase.
This in turn will increase the amount of money you owe each month. At this point, your missed or late payments will be reported to the credit bureau, which will negatively impact your credit score.
Some credit card companies will send your debt to a collection agent, who will also be reported to the credit bureaus. You can even be sued by your creditor and sued.
The moral of the story is that you should try as much as possible not to default on any of your debt payments. The additional penalties, fees, and stress will be worse than the upfront payments you owed. However, if you’ve ever defaulted on a loan, there are things you can do to improve your credit for the future.
- Communicate with your debtors to settle the payment for an amount less than what you owe and / or set up a payment plan to pay your balance
- Request that your paid debt collection be removed from your credit report
- Keep working on paying off the debt you still owe (both in default and not)
- Keep an eye on your credit report and dispute the errors listed
- Only incur debts that you are sure you can repay
- Make all your debt payments on time
- Apply for a secure credit card from your bankTo learn more about improving your credit, check out this article on invisibility of credit.