Lenders provide you with loans. Alongside, they are keen to get back the principal amount with the interest. Simply put, the repayment of the sum is a legal agreement between a lender and you.
So, what happens if you fail to repay a loan? Primarily, the bank allows you the opportunity to restructure the loan or take legal action. Ultimately, repayment failure will impact your credit score, loss of collateral, dealing with third-party collectors, etc. Let’s explore what top financial advisors have to say. Besides, what are the indicators of a successful personal loan application?
What Happens If You Fail to Replay a Secured Loan
First, what happens if you fail to repay the secured loans? Then, we will discuss the consequences of defaulting on unsecured loans like personal loans.
Loan Restructuring
If you are truly facing difficulties in repaying the loan, the bank or respective financial institution might extend an offer that restructures the loan. Thus, they might reduce the monthly installment, repayment frequencies, etc. These steps help you to pay back the loan while tackling financial difficulties. Plus, learn about the down payment system for a personal loan.
Legal Actions
If the bank fails to revoke your asset or collateral, it will send you some scheduled legal notices. In general, the notices inform you what is going to happen next if you do not reimburse the loan. Basically, a loan is a legal agreement.
Hence, the lender has the authority to initiate a civil lawsuit against you within the judicial system. It can potentially lead to the issuance of an arrest warrant for the defaulter. The lender retains the legal prerogative to pursue legal action against you, even for any partially remaining payments.
Loss of collateral
Besides the above options, the bank can also claim possession of collateral like your house, car, or any sort of tangible property. During the loan agreement with the financial institution, you have listed these as your assets to back up the loan application. As you are a defaulter, the lender can take your property to recover his lost money.
Encountering Third-party Collectors
You will not see this term anywhere on the official papers or discussed openly. But financial institutes have another instrument. When you fail to pay back the loan and ignore the bank’s notices repeatedly, the bank will try everything to get back their money.
Even though it is illegal, the bank will sell those loan liabilities to a third party for a reduced price. These third-party collectors will get back the money by hook or by crook, including threats, etc. You will eventually repay the amount to return to a normal life.
Mental Anxiety
Being a loan defaulter is a frustrating factor. You are morally and legally bound to pay back the loaned amount. Your inability to pay back the money will put you between a rock and a hard place. Enormous mental anxiety will push you 24/7. How can you refinance personal loans with the same bank?
Methods of Recovering an Unsecured Loan
Now, let’s check out the consequences of failure to pay back any unsecured loan, like a personal loan.
Collection Efforts: The lender might try to get their money back by themselves or by selling your debt to another company. This new company will contact you through calls, letters, emails, or texts to ask for the money you owe.
Legal Actions: If your loan isn’t connected to something valuable (like a house or car), the lender or the new debt collector can take you to court. This could lead to two things:
- Wage Garnishment: They might take some of your salary directly. You should know that this provision is legally approved.
- Asset Lien: They could claim ownership of something you own, like your house until you pay them back.
If your loan is tied to something valuable, like your car or savings, the lender can legally take that to cover your debt. For example, if your loan used your car as collateral, take your car away. We know unsecured loans are not backed up by collateral. However, people use their assets to back up the loan to get a bigger amount.
Lastly, if someone co-signed your loan (like a friend or family member), they are responsible for paying it back if you cannot. So, failing to repay a loan does not just affect you; it can affect others, too.
How Can You Avoid Defaulting on a Loan?
The following activities help you avoid defaulting on a loan.
Do Strict Budgeting
There is no escape from the repayment. You must arrange the money anyhow. Avoid lavish and unnecessary spending. For example, allocate only 50% of your monthly amount for your living cost. So the rest can go to the loan payment.
In this case, many people have become successful by applying the 50/30/20 rule, which is the classic approach to budgeting. Here, 50% goes for living costs, 30% toward wants, and 20% for saving and debt payment.
Take Debt Consolidation Loans
Combining all your debts through a personal loan could help you reduce the substantial payments you are currently making. It may also get you a more favorable interest rate. Debt consolidation loans help merge various debts, such as credit card balances, into one single loan.
This streamlined approach can accelerate your debt repayment, refinance personal loans, minimize fees, and secure more advantageous rates. When does a personal loan show up on your credit report?
Take the Service of a Debt Counsellor
We suggest this option if you have a massive loan. If you require assistance in crafting a budget, consult professional guidance for debt counseling. This is an affordable option to regain control of your financial situation.
Debt counseling services frequently come with minimal or zero charges. These counselors can offer a range of assistance, spanning from devising a debt management strategy to bankruptcy filings.
Final Words
So what happens if you fail to repay a loan? We hope now you have a clear understanding. The first thing is think strategically. There are several solutions in front of you. You just have to pick the right one. Finally, we strongly suggest you do not even think of running away without paying. It will land you even bigger trouble.