Defaulting On Your Loan Payments


Let’s face it, even the most financially conscientious person runs into problems and emergencies that are out of our control. While some may be minor, others can be life changing. It can clean up our savings and put us in debt. It can event prevent us from paying our existing debts.

When you are out of options and you can’t find ways to gather enough funds for your monthly payments, one viable solution is to default on your loan. However, even if sometimes it is the only way, defaulting comes at a huge price. So what happens when you choose to default on your financial responsibilities? Here are just some likely scenarios.

Your Credit Rating

When you default on your payments, the result is not instantaneous. A missed payment or two would only earn you reminders and warnings. After a month or two has passed, your lender will finally report your negligence to the relevant credit bureaus. Once reported, your credit rating will plummet. Not all loans affect your credit rating the same way. High interest and high payout loans will always give the most negative impact on your credit rating, while small, short-term loans will have a small, yet definitive impact.

Lower credit ratings mean that you’ll have a lot of trouble applying for loans and credit cards in the future. The impact of low credit rating extends outside lending institutions – don’t be surprised if finding an apartment, car insurance, or telecommunications service (mobile phone or landline) becomes difficult as well. A low credit rating means you can’t be trusted with money, so any institution that depends on trust will most likely hesitate when it comes to you.

Defaulting is Expensive

If your debt remains unpaid, the case will be escalated to collectors. You might find yourself receiving some very intimidating letters from your lenders, gently reminding you to pay your debts or else their lawyers will take action. With large debts, like those from major banking institutions, the court can rule with your lenders, and force you to give up assets and even confiscate your wages to pay for your debts.

The entire process will of course, cost you a lot of money. Not only will you be forced to pay off your debt, but most lenders will impose late payment fees and other penalties. Factor in the legal expenses you need to take care of if thing reach the courts, and you might find yourself in an even bigger financial hole than before.


Secured loans have a bonus consequence – repossession. Whatever you put up as a guarantee will be taken away from you. If it was an auto loan, your car will be repossessed. If it was a home loan, then your home will be taken away.

While the scenarios above might be scary, these are situations you might find yourself in if you are not careful enough. The best way to combat this is to take care of the problem as soon as it arises. At any point during your loan payment you feel like you will be unable to make further payments because of financial emergencies, talk to your lender and tell them your situation. Lenders will of course want you to pay the amount in full, so they’ll try to work out a solution that benefits both parties.