What are the Consequences of Defaulting on a Personal Loan?

Defaulting on a personal loan will bring different consequences depending on how the loan contract was originally obtained. Defaulting on any type of loan, large or small, will have universal financial repercussions. Personal loans are unique because they are not taken out for a specific purchase or asset. Instead, personal loans are often used in emergencies or to pay off other debts. This means they are usually high-risk, high-cost unsecured loans. 

Credit Score Drops

Missing payments on a loan is enough to send your credit on a downward spiral. Your credit report is actually two sections; the first section has your score, and a second illustrates every single debt payment you have made for many years. When you miss a payment by 30 days, a mark appears on this illustrator. A more significant mark appears for a payment that is 60 or 90 days late. Any time a loan goes into default, the lender will notify the credit bureaus, and this is a detrimental mark against your personal credit. If your loan is unsecured, the affect on your credit is multiplied.

Paying off an unsecured loan effectively will give your credit a large boost, and missed payments will knock your score down further. Aside from bankruptcy, defaults are the longest-standing derogatory item on your personal credit score. As your credit drops, interest rates on any adjustable loans you have, such as credit cards, will go up significantly. This makes all of your other loans more expensive. 

Asset Seized in Secured Loans 

When you use an asset as collateral on your personal loan, you have given the lender the right to seize this asset when you default. Secured loans are less risky for the lender, making them less expensive for you. They are, however, riskier for you. Personal loans can be secured against cars, businesses, homes and even stocks or savings. These assets are technically owned by your lender until the loan is paid off.

You will usually receive a notice of default before the lender comes to seize your asset. This notice is a protection provided in most loan contracts. Once you have received the notice, you need to be extremely proactive to prevent a seizure. Most lenders will not wait; they will show up at your work or home and simply take what you owe them. The only way to avoid this is to work out a payment schedule, settle the debt, or file for bankruptcy protection.

No Asset Seized in Unsecured Loans

An unsecured loan does not use an asset for collateral. If you took out an unsecured personal loan, you likely accepted much higher interest rates and higher monthly payments in exchange for putting the burden of risk totally on the lender. When you default on an unsecured loan, your lender will still attempt to collect in any means possible. You may find a notice to appear in court to attempt to settle the debt. Ultimately, however, you have not risked any specific personal assets with your default.


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