A loan default is when you fail to make loan payments according to your loan agreement. It can have severe consequences, such as harming your credit score, which makes it more challenging to apply for credit. It also increases your debts and could result in litigation if the other party takes you to court to recover the debt.
If you’re currently in a situation of struggling to make loan payments, it can be a stressful time. However, there are ways to resolve the issue so that you can get back on track and have healthier finances.
Read the rest of this article to explore different types of loan defaults, what happens when you default on a loan, what you should do during a loan default, and when you should consult with a lawyer to help you.
What are Common Types of Loan Defaults?
People can struggle to make payments on various types of loans. Generally, there are two types of debts involved in loan defaults.
Secured Debts
This type of loan default involves assets, such as insuring a house or car, that provides security if payments aren’t made for the loan. These assets can be repossessed to cover the nonpayment.
Unsecured Debts
These are loans not attached to assets, such as student or credit card loans. However, a creditor can still claim for the money being owed.
What Happens When You Default on a Loan?
Depending on the type of loan you’re paying off, consequences of defaulting will vary. Here’s a rundown of consequences for auto, personal, credit card, and student loans.
Auto Loans
If you go for three months without making an auto loan payment, you will be viewed as defaulting on the loan. Since it’s a secure debt, your vehicle might be repossessed if you don’t make payments.
Personal Loans
When taking out a personal loan, default will usually be considered three months after you stop making payments on it. It’s an unsecured loan so there’s nothing to repossess for nonpayment.
Lenders will alert collection agencies, who will try to regain the payment from you. In extreme cases of nonpayment, collection agencies might take legal action.
Credit Card Loans
It’s common to get a six-month grace period from your issuer within which to make payments. Debt collectors might reach out to you to collect the debt, or file a lawsuit to force you to pay the debt.
Student Loans
While federal student loans can have the longest grace periods, you’ll need to pay off the entire debt after that time (which is usually 270 days). Private student loans have shorter grace periods, usually 90 days. If you fail to pay your student loans, you could have to deal with debt collectors or be taken to court.
What Should You Do if You’ve Defaulted on a Loan?
To prevent having to deal with legal action and other complications, you should take prompt action to remedy the situation of defaulting on a loan.
Negotiation
Contact the lender and try to negotiate a lower amount. In some cases, you might have to pay a lump sum, which might not be practical if you’re struggling financially.
The important thing is to get in touch with the lender to inform them, as they will be open to working with you to settle the payment terms.
Refinance Your Loan
If you’re defaulting on a loan such as your mortgage or student loan, you could refinance it to decrease your monthly payments so that you can better manage them.
Contact a Credit Counselor
In some cases, you could gain assistance from credit counselors to help you manage your debts.
File for Bankruptcy
This is usually a last resort, but it can help you if previous default remedies have been unsuccessful.
What Should You Do to Avoid Defaulting on a Loan?
The most important thing to do if you’re at risk of defaulting on a loan is to consult your lender. They can often help you to adjust the loan, such as with repayment plans that accommodate your budget.
Another option is to consider debt consolidation. This is when you combine all your loan balances into one loan. The benefit is that it can provide you with lower interest rates.
When Should You Speak to a Lawyer for Loan Defaults?
It can be stressful to deal with loan defaults alone, as you might not be sure of what option is best for your specific situation. A lawyer from ContractsCounsel, an online legal network connecting clients with vetted lawyers, can assist you with the situation.
Here’s what a lawyer can do for you.
Review Your Loan Contract
A lawyer will review your original loan agreement with a keen eye, checking for any red flags or vague language. They’ll also check that creditors have followed the correct legal steps for gaining payment, such as serving you with notices.
Negotiate on Your Behalf
A lawyer will give you peace of mind by taking over communication with your creditor. They’ll use their negotiation skills and legal expertise to help you reach a favorable settlement, such as with an extended loan agreement to assist you in making payments.
Stop Pushy or Illegal Debt Collectors
If debt collectors are harassing you for the money you owe, your lawyer will step in to stop them. They will remind you of how debt collectors are and aren’t allowed to seek payment from you.
For example, although debt collectors are allowed to take legal action, they are not allowed to harass or threaten you.
Represent You
Should your nonpayment result in repossession of a vehicle or home, or wage garnishment, your lawyer will guide you through the process while prioritizing your needs.
Do you need a lawyer for a loan default?
If you’re facing a loan default, you should contact a lawyer from ContractsCounsel. Your lawyer will help you choose the best option to help you deal with nonpayment, avoid creditors from taking legal action, and minimize your financial and legal risks.