No one ever intends to default on a loan, but sometimes circumstance gets the better of us. Hopefully you will never find out firsthand, but you may be curious to find out what happens during a loan default.
To address that, it really depends on what kind of loan it is.
If you have taken out a “secured” loan, like a car loan or a mortgage, then a loan default will mean the lender can take possession of the collateral. In other words, they can repossess the car or foreclose on the house or property.
However if it isn’t a secured loan back by collateral the answer becomes a lot more complicated.
Repercussions of Loan Default
For federal and government based loans, like student loans, they will quickly move to garnish your wages. The money you owe will slowly come out of your paycheck, like it or not! They will also withhold any future tax refunds you might get until the loan is repaid.
For private lenders and credit cards, they often times can’t garnish your wages. They may repeatedly contact you through phone and email, encouraging you to repay your debt. There are strict laws against harassment, however, and most lenders follow those industry rules.
One thing that is sure to happen is that your delinquent loan will be reported to the credit bureaus. This could have a major impact on your life.
A person’s credit score is more important than ever. It is not merely used by banks and lenders to determine acceptance of future loans, it touches every aspect of your life.
Potential employers and landlords might check your credit score before hiring you or letting you sign a lease. If you want to sign up for insurance, utility services, or even a long-term phone contract, a low credit score might stop you.
The point is that even if your loan default “saves” you repaying a little bit of cash, the long-term consequences will hurt you for a long time.
If at all possible, avoid loan default. If you see it coming and can’t stop it, contact your lender first and try and work out special arrangements.