What Happens if I Don’t Pay My Loan?
For most Americans, taking out loans is a fact of life. Unless you can pay cash for the home you live in, the car you drive, for a college education, and for the multiple purchases you make, mortgage loans, auto loans, personal loans, credit cards, and home equity loans become a necessity.
This is not necessarily a bad thing, as taking out any loan or opening up a line of credit is essential when it comes to building up your credit score and teaching yourself how to manage your personal financial situation.
However, there are consequences of not paying your debt in the fashion you agreed upon when you were approved for a loan or opened up your credit card — and the consequences of not paying can be very detrimental. In this post, we will cover what can happen to you if you fail to pay your loans and certain exceptions you may qualify for.
General Consequences of Not Paying Your Debt
If for some reason you miss a loan payment, we recommend that you pay it as soon as possible. But if you keep missing payments, you risk defaulting on the loan, states Credit Karma.
When this occurs, the loan will probably be sent to a collection agency or sold to a third-party collection agency. From there, the sole goal of the agency is to retrieve the money that you owe. Here are the ways defaulting on a loan can impact you:
- Credit score: Defaulting on a loan is a credit score killer. In fact, defaulting on a loan can drop your credit score by up to 350 points, warns US News. This will not only reflect poorly on you as a consumer, but it will also impact your credit eligibility and whether you will be approved for any other line of credit that you apply for. In addition, a defaulted loan can stay on your credit report for up to 10 years — even if you settle it.
- Personal finance: If a collections agency or creditor pursues a judgment against you, they may be able to collect what you owe via wage garnishment or seizure of property.
- Legal status: According to state and federal law, it is not illegal to default on loan. However, as we mentioned in the above points, the financial consequences can be damaging to your personal situation.
- Daily life: Day-to-day life can be significantly uprooted if you were to default on a loan, based on much of the information already shared in this post. However, there are some exceptions and things you can do to take back control of your financial situation.
Are There Any Exceptions?
In certain situations and with certain types of loans, there are exceptions. There may also be legal reasons to not pay in certain scenarios. Here are a few instances where you may be able to take advantage of exemptions:
- Forbearance and deferment: Most commonly associated with defaulting on a federally held student loan, borrowers may be eligible to defer or make a reduced payment for up to three years if they meet specific financial hardship requirements, says Debt.org
- Rehabilitation: Agreements made between borrower and lender that may be able to undo a default if certain conditions are met over an agreed-upon period.
- Bankruptcy: Though this should always be considered a last resort, it can completely erase a judgment. However, filing bankruptcy basically allows anything you own to be liquidated to settle as much outstanding debt as possible with creditors.
If you know you are going to be late or short on a payment, it is always best to take preventative action and contact the lender directly. Be upfront and honest with them. Perhaps the lender will work with you on debt forgiveness or develop a revised payment plan (or other actions) to make things more manageable. Also, planning how you pay off debt helps you prevent situations like this.
Will I Go to Prison?
This is one of the most common questions we are asked today, and the answer is “no”.
Prison time is a punishment in certain financial cases, but not when it comes to defaulting on a loan, Debt Wave clarifies. If you failed to pay taxes or child support per a legal agreement, then prison time may eventually become a punishment.
Is Transferring or Sharing Debt an Option?
It is a possible solution and is mostly used when it comes to credit card debt. In terms of transferring debt, it is possible to consolidate multiple types of credit into one account with only one monthly payment.
However, we only recommend taking this route if the balance transfer fee is free or a minimal amount, and if the interest rate on the account you’re transferring it to is lower than the average interest rate you were paying before. It may also be possible to transfer your debt to another individual’s credit card in some circumstances should they be a willing recipient. Learn more with the How-to Guide to Pay Off Debt.
It is Up to You
Defaulting on a loan does not make you a criminal. It is not against the law if you fail to pay back a loan, but it will hurt your personal financial situation. Nonetheless, you can build yourself back up to a more favorable financial position with the right mindset, tools, and best practices. In fact, if you do it right, you can spend and pay off your debt at the same time. Contact us today to learn more!