Thinking about a personal loan? Before you do, make sure you read this entire article know all the facts. There could be a ton of reasons why you might need a personal loan. It could be for something new and exciting like a car or vacation. It could also be for some unplanned emergency expense that you do not have the money to pay.
Not all reasons for needed a loan are happy ones, but no matter the need, the same considerations need to be made by you. You should enter into a loan agreement thinking that you will do anything to avoid defaulting on a personal loan. No one wants to be in default. That is a scary position in which to find yourself. Keep reading to find out how to avoid falling into default on a personal loan.
What Is A Personal Loan?
In order to help you to avoid defaulting on a personal loan, it is important to understand what is a personal loan. In the simplest definition, a personal loan is money that a lender allows you to borrow. The lender charges you interest to allow you to borrow the money. The interest rate a lender offers you is directly related to your credit score.
You promise to the lender that you will make regular monthly payments per the terms of your agreement. Typically, a personal loan is paid back in three to five years. I mentioned some key words that you want to remember. They are important and I talk about them again later in this posting. Those words are interest rate, credit score, and regular monthly payments.
You can do just about anything with your personal loan once approved. A lender typically asks your intention for the money. Typically, the lender does not base your approval on your reason for needing the money. People have used personal loans to pay for weddings, houses, home repair cost, or a new wardrobe. You can use a loan for anything you can imagine.
Keep in mind that just because you can, does not mean that you should. A lender may agree to approve you for a loan, but that does not mean you can afford the loan. Your budget should play a key role in making the decision to get a consumer loan, which is another name for personal loan.
Are There Different Types of Loans?
There are many different types of loans available to you. There are also many different loan places in which you can obtain a loan. Make sure you read and understand all of the fine print when agreeing to the terms of your loan. A lender must disclose all of the fees and charges in their agreement with you. It is up to you to read the agreement. There are traditional loans that you find at a bank. These types of loans may have slightly lower interest rates, but you must go into the bank to apply. A loan office must fill out the paperwork with you.
These loans tend to take a little longer process. Not as long as they used to as the process has become much more streamlined. For those who have no interest in going into a bank, online loans are available. As the name states, these loans are available completely online. You fill out the application and upload any documents all on the same website. You do not have to interact with a person. These loans typically have higher interest rates. Not that long ago, they were only for those with bad credit. That really is not the case anymore.
Another type of loan is a payday loan. This loan is different because is it intended to be short term. You borrow small amounts of money with the expectation you pay it back in a short amount of time, like two weeks. Your credit is not a factor for payday loans. The only thing they care about is your income. No matter what way you obtain it, you want to avoid defaulting on a personal loan.
When it comes to online personal loan lenders, you must be cautious. Some online lenders are looking to scam borrowers. They are looking for people in vulnerable places to get more money out of them. You can avoid falling into this trap by arming yourself with knowledge. Research any potential lender and find out all you can about them. Your lender should have credentials to lend money in your state. Make sure that any lender you use has the appropriate credentials.
You can also use Loanry! We connect you to reputable lenders quickly and efficiently. By filling out this form below, you allow us to research the database and find unique offers suitable for your situation.
What Does It Mean To Default On A Loan?
Defaulting on a personal loan essentially means that you are not paying on that loan. However, lenders seem to have different ideas of what defaulting truly is. In some cases, you miss one payment, and the lender says you are in default. Other lenders wait until you miss a series of payments, two or three, before they claim you have defaulted on your loan.
It is important to understand how your particular lender views default so that you can avoid defaulting on a personal loan. Once a lender considers you to be in default, they hold nothing back in getting their money. Trust me, a lender always gets their money. Once you have fallen into default, the lender has a few ways to handle it. Typically, the first thing that happens is the collections letters and calls. At first, it is directly from the lender.
Eventually, the lender may decide to sue you or turn you over to a collection company. When your lender turns you over to a collection company, the lender has basically sold your debt to the collection company. They got much less money than what you owe them, but they got some money and they write off the rest. The collection company, however, is relentless. Believe me when I say they do not care about you. Their only focus is getting their money back. Remember, they just paid the lender for your loan, so they basically paid to harass the money out of you. It is not fun being on the other end of that.
If you can, I suggest you settle with this company. Depending on the company, they may be willing to work with you on a settlement amount. If this does not happen, you may end up in court anyway.
Can I Be Sued If I Default On A Loan?
As I mentioned above, yes you can be sued. You should avoid defaulting on a personal loan at all costs. Depending on the amount of your loan, if it is small enough, the lender may write it off. If it is a large amount, like a mortgage, someone is going to sue you. It may either be the actual lender or the collection company that sues you. In addition to being sued, the property, in the case of a mortgage, is seized, so you lose your house.
If you choose not to go to court, the court will issue a judgement. That judgement could include garnishing your wages, taking money out of your bank account, and sending a sheriff to your home to seize your personal property to pay the money that you owe. A sheriff knocking at your door is not that likely, unless you owe a lot of money and you have a sizable amount of assets in your home. The court may require you to disclose that assets that you have. Bottom line, show up in court.
If you show up in court, you have the opportunity to work with the collectors and come to some agreement on payment. Together you may be able to come up with a payment plan. Often times, when in court a collector is more agreeable to payment plans. When dealing with you directly, they may not be as willing to negotiate. In court, however, it is different. If the court see that you are attempting to make payments and the collector is not allowing you to do so, that reflects badly on the collector.
Can I Go To Jail For Defaulting On My Loan?
If you are the average run of the mill person who defaulted on a personal loan, you are not going to jail. You should still avoid defaulting on a personal loan, no matter what. However, you do not have to fear going to jail. Although you may be put throw the ringer by the lender or a debt collector. Someone in your position is not going to end up in the slammer. Now, if you have committed some type of crime and there was some type of debt as a result. A real life example of that is a financial advisor taking some money off the top of all his clients investments. He now owes money to all of those people, but he has also committed a crime because he stole all their money.
The real reason he is going to jail is because he was stealing money. There probably was a time hundreds of years ago where people would go to jail for not paying their debts. Those same people would also have their hands cut off for stealing. We have come a long way since then!
I Do Not Think I Can Pay My Loan; Now What?
Here is the thing, if you know you are getting into a place where you cannot pay your bills, reach out to the lenders. Believe it or not, many lenders are willing to work with you to get you in a place where you can pay them. They want you to avoid defaulting on a personal loan, too. Their bottom line is at stake here. If you are honest and contact them, they may work with you. They might be willing to let you skip paying them for a month. They may be willing to take half of the payment you owe them for a few months.
By entering into this agreement, you are promising to pay the amount you agree upon. You are also promising to begin paying the regular payment amount on a specific date. Keep in mind, they are not writing off the amount you are not paying them. They are adding it on to the back end of your loan.
Lenders know that working with you is a better option. They know if they accept a little less money now, you may be able to get back on track and pay them what you owe them. They understand that things happen and sometimes you might find yourself in a jam. Truthfully, the best way to handle this is to be upfront. I know it may seem embarrassing. I know it may seem like you are begging them. You may have to get over that feeling to do what it is your best interest.
Is There Any Way To Protect Myself From Defaulting On A Loan?
As I stated above, if you know that you are getting into a position where you are not going to be able to pay your loan, you should ask your lender for help. However, there are ways to avoid defaulting on a personal loan all together. I understand that things happen and we all find ourselves in an emergency situation. Once you find yourself in the situation, it may be hard to get out of it, especially if you have a lot of bills.
Smart Money Tip!
The best way to avoid this is to not get into this situation. Before you apply for a loan, determine if you really need the loan. Are there other ways to get extra money? Is it possible for you to get a part time job to cover those expenses. Can you borrow money from family or friends, so that you do not have to go to a lender.
There may be other options. You should consider all of your options and applying for a loan should be one of the last options.
Understand Your Budget
Earlier I mentioned that there are many things you should consider before applying for a personal loan. One of the things you need to take into consideration is your budget. You should not take out a personal loan that you cannot afford to repay, thus avoid defaulting on a personal loan. It is important to understand your budget before jumping into a loan.
You should consider using a budget application to get a handle on your finances. With the help of an application, you can list out all of your budget expenses, line by line. This allows you to take a look at all the ways you are spending money. It also helps you see all the ways you are wasting money.
It gives you an indication of where you may be able to reduce your expenses. Do you have a gym membership or magazine memberships that you are not using? Now is the time to cancel them. Do you have a habit that you can cut out of your budget? Maybe you buy coffee every day. You can make coffee at home and save yourself a lot of money. This may also be the time to cut out a bad and expensive habit, such assmoking. You can save a significant amount of money by breaking that habit.
Take a look at your income
Once you see all of your expenses and cut the expenses where you can, you have a good idea of the money you are spending. Once you have done that, you can take a look at your income. Then you can see the difference between how much you bring in and how much you spend. That also lets you know how much is left over after all your existing bills are paid. Once you know that amount, you should not apply for a loan that is more than the amount you have left. If you do, you are putting yourself in a terrible position, one where you are taking on a loan that you cannot afford.
Why Does Interest Matter?
Interest plays a large role in the amount of your personal loan. It can increase the amount of your personal loan to a place you cannot afford. Learn as much as you can about interest rates to avoid defaulting on a personal loan. You should think of interest as a charge from the lender for allowing to borrow money. The amount of the loan you borrow is considered the principal amount. The lender adds interest to that. The interest associated with your loan is a reflection of your credit score. The better your credit score than the lower your interest rate will be and the less money you end up paying.
There are a few things, other than your credit, that impact the interest rate you receive. Interest rates change, but only some rates are set by the Federal Reserve. Personal loan interest rates are usually set by the lender. They issue a benchmark rate, which is what the banks use when lending money to each other. This is also the rate off which they base their own interest rates. They know they have to be competitive and smart about the rates they set. They want their customers that have money collecting interest in their banks to receive the most value. This is how they keep them as customers.
They also know they have a lot of competition and have to keep their loan rates at a reasonable amount. It is important to have basic knowledge about loans and understand how they impact you. Remember, interest is what is added to your principal loan amount. A lender determines what interest rate to charge you based on your credit score.
What Does My Credit Have To Do With It?
I keep mentioning your credit score, so let me tell you why it is important. As I have mentioned a few times, your credit score directly impacts the interest rate you receive. Your credit score may seem like an insignificant three digit number, but it is a huge deal. Your credit score is prominently displayed on your credit report. Your credit report is a detailed listing of all of your activities involving credit. It shows your payment history, how much debt you have and how you use it.
It shows the age of your credit. It shows all of your late or missed payments. It even shows loans on which you have defaulted. All of these items listed on your credit report impact your credit score. It is built, or destroyed over time and gives lenders an indication of your credit worthiness. It takes hard work to build your credit score. However, it only takes one or two missed payments to send it downward.
Typical credit scores range from 350 to 850. A perfect score of 850 is difficult to achieve. Most people have a credit score somewhere between 600 to 750. Good credit falls somewhere between 670 to 800. Anything below 570 falls into the danger zone of bad credit. When you have bad credit, it is much harder to get a good interest rate. You may find it is difficult to be approved for a loan. Lenders feel those with bad credit scores are not able to avoid defaulting on a personal loan.
Should I Consolidate My Debt?
Consolidating your debt may help you avoid defaulting on a personal loan. When you consolidate your debt, you are taking all of your individual debts and creating one large debt. This requires taking out a personal loan large enough to cover all of your combined debts, or using a debt consolidation firm. There are some obvious advantages to this. You are able to focus on one payment, instead of many different payments.
You may be able negotiate a lower interest rate on the new loan than what you are paying on your other debts. Right now, you may only be able to pay the minimum payment, which does not help you pay off the actual debt. Consolidating your debts allows you to chip away at bigger pieces of your debt. If you feel like you cannot make any of your payments, debt consolidation may help you avoid defaulting on a personal loan.
Is There A Negative Side To Consolidating My Debt?
As with anything, there is no guarantee that you can avoid defaulting on a personal loan by consolidating debts. Debt consolidation is not for you if you are trying to avoid defaulting on a personal loan. It only helps if you have multiple bills or loans that you are trying to combine together. It will not be much help if you only have one loan. Often interest rates are higher for debt consolidation loans. You may wind up paying a high amount for your monthly payment. You should keep in mind that debt consolidation is not quick. It will still take you a long time to pay off your debts.
Not all debt management and consolidation programs work in your best interest. Forbes magazine lists many debt consolidation programs that you should avoid. Some of them will make no payments on loans and credit cards while trying to negotiate with them. This can negatively impact your credit because it is seen as you missing payments. It does not matter that you have a company trying to negotiate a better deal for you.
One of the major cons to debt consolidation is it gives you the feeling that you have paid off your debt. Your credit card balances are zero and your other loans are paid. However, you still have a major debt to pay. You can run the risk of beginning to use your credit cards and racking up large debt again. If you choose to consolidate your debt, you must be careful not to fall into the trap of using your credit cards again.
The best way for you to avoid defaulting on a personal loan is to carefully consider every loan and credit card you use. If you have a clear understanding of your budget and your finances, you can spend wisely. If you know what you can afford and you do not live about that, you should safely stay out of the danger or defaulting on loans and impacting your credit. Emergencies come up and we cannot avoid them. However, you can be smart and do your best to prepare for them. You can take a look at your budget today and make cuts to help improve your finances. It is never too late to take control.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.