Before we get into the meaning of a default on a personal loan, let’s look at the numbers. It’s rare to find a business default on its loans, but in 2018 less than one percent did. Consumer loans or personal loans, on the other hand, is currently at a 3.63 percent default rate. The Federal Reserve only tracks bank loans, but personal loans have fewer requirements, thus are defaulted upon more often.
Delinquency rates (60 days or more past due) for personal loans is currently 3.63%. That compared to what the Fed saw in the first quarter of 2019 for other loans; 2.59% in credit card debt, and 2.12% delinquency rate in other types of loans.
The Department of Education reports that, in 2013, 11.5 percent of students making payments to repay their student loans defaulted on the loan after two years. Forty-four million students owe 1.5 trillion dollars in student loans, says Forbes, and student loan debt is the largest debt category following mortgages.
On the other hand, personal loan delinquency rates are relatively low when compared to historical numbers. According to LendingTree, Personal Loan Delinquency Rates (60+ days past due) numbers “hit a high of 5.1% in 2009, the peak of the Great Recession.”
Those are the numbers. How is a default on a personal loan looked upon by lenders? For some lenders, default is missing one payment. For other lenders, it’s 30 days late, while more lenders tend to let some months go by before they consider a loan in default. Defaulting on a personal loan has consequences that lenders use without compunction to get their money back. What are the consequences?
The Legality Of Loan Defaults
First, you should know that a creditor can’t just toss you in the pokey for non-payment that puts you in a debt cycle. They must go through legal channels.
Before he does that, he’ll put your personal loan debt through collections. If, after some months, you default on a personal loan, he’ll put the debt out for collection. Debt collectors include lawyers, individuals, and companies that buy debts for collection. Methods of the collection include letters (some look like Western Union wires,) and phone calls.
It differs from collection company to collection company how long the calls and letters will continue. Most continue for 180 days. By that time, if the debtor (you) either refuses or simply can’t repay the consumer loan, the collector might sue you. The court will notify you of the court date, and it’s a good idea to show up. If you don’t, you’ll lose by default, and will end up paying not just the loan balance but court costs as well.
Another method of collection is selling your debt to a debt buyer. You will no longer owe the original lender. You will be dealing with the company to whom he sold the personal loan debt. This company will attempt to get you to pay up, so it won’t lose the money laid out to buy your debt. Be aware that there are law firms that buy loan debts. Letters and phone calls from lawyers tend to get most people’s attention, not to mention making their blood run cold. Either way, it’s a good idea to work with these people to pay off the debt.
Expect to be sued if you’ve borrowed a significant amount of money and your assets are equal to or more than the amount borrowed. If you own a business, for example, then your physical property could be seized as well as your accounts receivable. When you default on a personal loan, a judgment from a court can be collected for up to ten years.
Collecting On A Judgment
This is the only time a creditor can legally reach into your bank account to take money in payment of a personal loan debt. The creditor can also seize any personal property worth the amount of consumer loan debt. Maybe, but doubtful you’ll see a sheriff knocking on the door with a court order for seizure of real personal property.
If you own a business, then it may be within his legal right to come to your business and take whatever cash is there including that in your pockets. The court could also assign to the sheriff to collect monies owed to you by customers and give it to the court. He could also seize any business property worth more than you owe on it to pay for the consumer loan debt.
On the other hand, creditors could not bother with all these physical collections stuff and simply put a lien on any personal or business real estate you own. Upon the sale of the personal or business real estate, this “judgment lien” is paid first.
Now that you know all of this, it would be a good idea to show up in court. You can always work with the judge and the creditor to iron out a payment plan that works for all concerned. You may or may not be required to pay court costs, but if you do, it would still be cheaper than losing all your property to pay off the fast loans debt.
Another tool for the collection of a consumer loan debt is garnishing wages. There are rules governing this as well. The amount taken from your net pay (after taxes and deductions) will be 25 percent. This is if you owe on a consumer loan or fast loans. If you own a business and pay yourself as if you would an employee, then your wages could be garnished. If you aren’t paid much, then the garnishment must be equal to 30 times the Federal hourly minimum wage, says Nolo.
Wages that cannot be garnished include retirement funds, disability, Social Security payments, unemployment, and worker’s compensation.
Also exempt from judgments are equity in one vehicle up to $5,000 and equity in a house up to $50,000, depending on your state. Check your state exemptions to be sure.
Paying A Collection Attempt
When things reach this pass, it’s a good idea to try to negotiate a payment plan that will fit your budget. After all, you did default on a personal loan because you couldn’t make the payments. Get a notebook and write down all your bills, loan debt, and income. Work out how much you can pay on the consumer loan debt. Even if it’s only $25, most creditors will take it rather than have to deal with the legalities of a default on a personal loan.
Most collections companies and lawyers will try to get you to settle the debt for a fraction of what it was. For example, they may tell you that they’ll settle the debt if you pay half of the original amount. What they do then is selling the other half to another collection agency or lawyer. Then you have to go through it all over again. Add to that the interest the IRS takes in all this, and you have a recipe for fright and frustration. For the sake of not getting a peptic ulcer, try not to settle.
How a Default On a Personal Loan Affects Credit
You wouldn’t have used a lender finder service to check if you could repay a personal loan if you weren’t worried about how the loan would affect your credit. The consequences of default on a personal loan vary from creditor to creditor. As I wrote earlier, a default can mean one missed payment, or it could mean several missed payments in a row.
Missed payments and derogatory remarks from creditors remain on your credit reports for up to ten years. These lower your credit scores and might even adversely affect your search for a job. You may have a more difficult time obtaining any other credit products such as loans or credit cards. Default on a personal loan affects your insurance rates as well as other financial products. They all check your credit reports, so they’ll know if you’ll repay their money.
How You Can Repair the Damage From Default On a Personal Loan
Working with creditors before your account goes to collections is the best way to handle repaying a loan. Their first attempt at collections is within their own company. Only after they fail will the collection be sent to an outside agency or collections lawyer. So your request for a payment plan you can afford should be attempted before the account goes to an outside agency. This payment plan attempt will positively affect your credit.
This can be accomplished in a couple of ways. If the lender won’t work with you, contacting a credit counselor will help. They will work with you to establish a budget within which you can pay your bills as well as the debt you owe and maybe have money left over. In some cases, the credit counselor works with the lender to establish a payment plan. They won’t make the payments for you; you still have to pay the lender. The credit counselor just paves the way for easier relations between you and the lender.
If the collections have reached the point of a lawsuit, then contacting a lawyer is your best bet. The lawyer will work with the court and the lender to establish a repayment plan. The judge will always rule in favor of the lender, but the lawyers will get a payment plan together. Be aware that you will be paying court costs, too, and these will be worked into the payment plan.
Work with Your Lender – Most of the Time They’ll Want to Help
If the debt owed is beyond the state’s statute of limitations, you can’t be legally sued. Collection agencies will still try it in order to get the loan repaid. However, though they can’t legally sue you, you still owe the money. It’s a good idea to negotiate a payment plan rather than let things go this far.
The only way to get out of a lawsuit is to tell the collections agency to prove that you owe the debt. The burden of proof is on he who brings the case. If you didn’t incur the debt, then the judge will dismiss the case. This is only if you didn’t incur the debt.
It pays to keep every piece of paper regarding the loan. To take collections off your credit, you’ll need documentation proving that you’ve paid off the debt in full. If you never owed the debt, you’ll need documentation showing this. Either way, send copies of the “paid in full” statements of the debt to the credit bureaus. Ask that any derogatory comments be taken off your credit reports.
You’ll also need proper documentation if there’s an error on your credit report. This would be the case if you’ve already paid the debt or if an incorrect item was placed on your credit. If collections agencies are still attacking you, lodge a complaint with the Consumer Financial Protection Bureau. Additionally, dispute the items with the Big Three credit bureaus.
There are dozens of reasons for applying for a consumer loan
Using a service to help find a lender for seeing if you can afford a loan is good only insofar as you have the wherewithal to repay the loan. If you’re interested in getting a personal loan, maybe Fiona and Loanry can help you with carefully selected reputable lenders.
I’ve written some scenarios in which you might be unable to repay a personal loan. A default on a personal loan is a very serious matter and should be avoided at all costs. Here are examples of the many reasons to use a personal loan: