Defaulting on a loan can be detrimental in more ways than one.
You may have applied for a loan with the intention to pay it back in full, but sometimes unforeseen circumstances may throw you off schedule. Missing one payment and then a few more could result in you defaulting on your loan.
If you currently have a loan in repayment, understanding the risks of default can help in creating an action plan to avoid it.
Loan Default & Your Credit Score
35% of your FICO score is dependent on your payment history. CardGuru COO Dan Soschin states,”Even a few late payments can negatively impact your credit score.”
Just one late payment could decrease a score by 100 points or more, and the negative marks could remain on your credit report up to seven years from the delinquency date. This could result in higher interest rates on loans and lines of credit taken out in the interim, which in turn means a higher overall cost of borrowing.
John Heath, credit expert and directing attorney at credit repair firm Lexington Law, says that the negative effects of defaulting on a loan do not stop at just your credit score. They can also prevent a borrower from getting new credit, buying a new cellphone, or even apply for a job.
According to a 2017 survey conducted by CareerBuilder, a whopping 72% of employers said they perform background checks on applicants. This could constitute a credit check too, and a low credit score could dissuade employers from offering a position especially if it’s financially sensitive.
Other Impacts of Loan Default
The negative impact on a credit score may be worrisome, but that’s not the only thing you have to be aware of when in loan default.
You could be put in collections, which means calls and letters coming in demanding payment, or even lawsuits of these demands go unanswered.
Creditors could also take further action by repossessing your assets, such as vehicles in the case of an auto loan default or initiate foreclosure on your property if you default on your mortgage.
In case of a loan default where there is no collateral, creditors could come after you by garnishing your wages or put a levy against your bank account. In the event of a federal student loan default, your federal income tax refund could be taken too.
If you are in danger of defaulting on your loan, it might be time to start taking your financial decisions seriously. And as always, the Financial Helpers are readily available to assist you.
