What happens if I default on an installment loan?

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Loan default happens when you regularly miss your monthly loan payments for an extended period of time. When this happens, your loan will get sent to a debt collection agency whose job is to recover the unpaid loan balance.
Defaulting on a loan can cause long lasting damage to your credit score, pile on late fees and in some cases, result in getting sued by your lender. Thankfully, there are ways to avoid loan default, especially if you act quickly.
Consequences of defaulting on an installment loan
Defaulting on an installment loan often leads to lasting negative ramifications on your financial health, especially when it comes to your credit score.
While there are a number of potential outcomes that could happen to borrowers in the case of default, it ultimately rests on the decision of the lender and its hardship payment relief options.
Credit damage
If your monthly payments are more than 30 days late, the lender may report the delinquent balance to the credit bureaus, which will result in a drop of your credit score by a few points.
Most lenders will use your FICO score when looking at your credit health and 35 percent of the score is made up of your payment history. Routinely missing the monthly payments could very well have a negative impact on your credit score.
What’s more, late or missed payments will show up on your credit report, which gives lenders and banks a holistic view of your credit health and history. When determining eligibility for products such as mortgages, auto loans and personal loans, lenders look at your credit report. A negative repayment history will remain on your report for 7 years and can reduce your approval eligibility for future loans.
Late payment fees
Most lenders – not all – charge late payment fees for delinquent payments. This fee can fall somewhere between $20 and $40; although, a $39 late fee is most common.
Depending on the loan type, your lender may offer a grace period. This is a set period of time in which you’ll receive no negative ramifications for a late payment. To avoid a potential late fee, check to see if your lender offers a grace period and make the payment within the set timeline if possible.
If you have a positive repayment history, have never missed a payment over a series of years or have an existing relationship with the institution, it doesn’t hurt to call and ask if they can waive your late fee. While this isn’t an option with most lenders, some may have a one-time waiver or offer a similar perk for existing customers.
Debt collection
If your debt is outstanding for a long period of time the lender may send the balance to a debt collection agency. This can result in regular phone calls, letters and emails from the agency in an attempt to collect the debt.
Debt collection can be a stressful situation, as the agency will likely contact you weekly, if not daily, about the overdue debt. Reputable companies must communicate that you have 30 days to dispute the debt in writing. If you fail to do so, the agency can continue to contact you. For certain debts, you may be able to negotiate a settlement or a repayment plan.
Keep in mind that harassment of any kind – like threatening jail time or police presence – is illegal due to the Fair Debt Collection Practices Act (FDCPA). If the debt collector engages in deceptive practices, like lying about who they are or how much is owed, you can report the company to government agencies or sue them for deceptive practices.
Potential court hearing
If all else fails, the lender may be able to sue you for unpaid past debts that fell into collections. If this happens and you receive a court summons, it’s important to know your rights as a consumer.
Debt collectors have a limited amount of time to file a lawsuit – known as the statute of limitations – and once this time has passed, collection agencies don’t have legal grounds to sue you for the delinquent balance.
The statute of limitations will vary by state, but it generally falls between three to six years. In some states, debt collectors may not be able to sue you past the statute of limitations, but they still can contact you. By this point, your credit score will have taken a massive hit. To avoid this, contact the agency, confirm your debt and discuss your repayment options as soon as you get the collections notice.
How to avoid defaulting on your loans
Avoiding loan default starts with your loan terms and agreement. Before signing on the dotted line make sure your finances can handle the monthly payments, both in the present and in the future. Consider potential emergency expenses or medical bills – will you still be able to keep up with payments should something happen?
If you can’t answer that question with confidence but need the funds, ask the lender or institution about extended repayment options or if it offers hardship payment relief. While relief options won’t pay down your debt they may reduce the risk of default and can make your monthly payments more budget-friendly.
If you find yourself in a sticky situation and are unable to make the payments, contact your lender’s customer service department immediately. It’s always better to be up-front with the lender and communicate your situation as soon as possible to reduce your risk of default.
How to get out of loan default
There are a few alternatives that can help you get out of default and back on your feet if you’ve already received the default notice. Other than speaking to your lender about repayment options, you can also look into borrowing a debt consolidation loan, although this may be hard to secure after defaulting.
If your credit is solid, you have a rich history of positive repayments or you have a creditworthy co-signer, you may be able to combine your defaulted debt with other open accounts through a debt consolidation loan. This will take your loan out of defaulted status. However, you’ll need to take a close look at your budget to make sure you can afford the monthly payments on the new loan.
A common option is to also seek out a credit counselor to help you manage and pay down your debt. Credit counselors offer services to help consumers get back on track financially and some organizations offer their assistance free of charge.
Frequently asked questions about loan default
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Defaulting on a loan is not a crime. Lenders don’t have legal jurisdiction to have you arrested for an overdue balance. However, defaulting on a loan will have serious financial implications and can result in the lender seizing your property as collateral (if applicable) and can be considered a civil offense, meaning that you could be sued by the lender for the unpaid amount.
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Depending on the lender, missing a payment past the grace period could result in an automatic late fee and lead to a small drop in your credit score. It’s best to repay the delinquent amount as soon as possible, as long standing unpaid amounts will result in a drop in credit, possible wage garnishment and default.
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Installment loans show up on your credit report in multiple ways. When you first apply for a loan, the lender will conduct a hard credit check, which will result in a drop in your credit score. The loan will also show up as an open credit account and if you miss a payment it will remain on your report for up to seven years.
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