Depending on the expenses you are trying to finance, be it for your car, your home or any other type of personal property, some personal loans can take tens, if not hundreds of thousands of dollars for years to pay off. Unfortunately, many potential borrowers forget something important when they want funding. When you have big expenses in sight and you have a decent income, it can be tempting to apply everywhere for loans.
However, many people do not think properly and do not think about the consequences if they end up not being able to make payments on a regular basis. In fact, your finances and your life could be affected in many ways if you ended up with unpaid debt in your hands. Depending on the size of the loan, whether secured or not, missing a payment on it could be worse than a slap on the wrist.
What does being in default mean?
Let’s say, for argument’s sake, that you just got a loan for the most important expense of your life, a mortgage. In the first few months, everything is fine. You and your lender have agreed on a reasonable repayment plan. You have a stable job and your financial worries are minimal. But what happens if you are suddenly out of work or if unexpected events surface and cause serious problems to your finances. Suddenly it seems like you will not be able to make your payments.
Being in default means that you have not complied with the terms of your loan contract. For some lenders, a missing payment means that you are officially in default, while for another, you have to miss some payments before considering your loan in default. A loan can also be considered in default if your payment is late or if you are unable to make your payments in full. Whatever the exact situation, you are in default and your finances and your personal life are suffering because of it. What happens next?
Usually, a lender, either a bank or another company, will give you a 30 day delay between each repayment payment. When you begin to default on your payments, this lender will call you and / or send you a friendly email reminding you that you have exceeded the designated time limit for your payment. Sometimes it can take a day or two, sometimes a few weeks, but sooner or later you’ll be joined. It’s not a big deal. A simple hello polite and it will be the boost that will move things to avoid paying a penalty.
The more time you spend, the more nervous you will be to call them back. Calls and voice messages will be more and more frequent and you will receive letters by mail. If you continue to ignore them, things will become more drastic.
How does a default on a loan affect your credit rating?
Your credit is a valuable tool that you can use in the future for a number of financial situations. For this reason, it is important to keep it in good shape. Although many lenders do not consider your credit rating before approving a loan, a favorable credit rating can be beneficial in one way or another. A high credit rating can help you get better interest rates for credit cards, and future loans, more reasonable prices for auto insurance and other benefits. However, once you start to default on your loan payments, your credit rating will be negatively affected. It could take more or less quickly after missing your first payment. Your lender is most likely reporting to at least one of the two Canadian credit agencies (Equifax or TransUnion). This means that once you stop making payments on your loan, the credit agency will know it. This is when your credit rating will be affected.
In the face of a loan default, chances are you do not think about your credit rating. But it’s important to keep in mind that lowering your credit rating and other financial missteps may prevent you from achieving your long-term goals.
If you already have a strong credit rating before defaulting on your loan, you will be more likely to get an “unsecured” personal loan. This is a type of loan that does not involve collateral and can be provided to consumers who have high credit ratings and a good track record of financial stability. (However, there are lenders who do not consider these factors). They can be used for a number of expenses, such as covering a medical emergency, buying a new car or other vehicle, tuition or debt consolidation.
Unfortunately, the prospect of a “lack of collateral” is a notion that many borrowers take for granted, as nothing will be seized in the event of non-payments. The first thing that will happen after your default is that your lender will start adding penalties on your bills. Collection agencies come into play when time passes without making any payments. If you still do not pay your unsecured loan, your lender could put could go to the serious stuff