When getting a loan, you have full faith in your ability to pay it off as per the agreement with the lender. But the truth is this is not always the truth because life can be uncertain. You might end up not being able to make payments for one reason or the other. The best way to avoid damaging effects on your finances is to act fast before the situation gets out of hand. Learn more about Disadvantages and Advantages of a Unsecured Loan.
You want to get it all under control as soon as possible to reduce an impending disaster that can hurt you. There are different ways you can stand to avert any issues that can arise and see yourself through this situation. No one foresees themselves as not paying back their debt especially when you know it’ll affect your credit score. Unsecured loans don’t require any collateral when applying which is why having a good credit score is a determining factor in getting the loan.
Consequences of Defaulting on an Unsecured Loan
You may find yourself in a situation where you have no option but to default on your unsecured loan as much as you’d want to pay off. For example, when you lose your job and have no other source of income. By defaulting on the loan, you end up suffering consequences that affect your life. Even if you don’t end up losing an asset when you default, that doesn’t mean you get off Scot-free.
a) Reduced Credit Score
When you fail to pay back your unsecured loan on time as agreed with the lender then this means your credit score takes a plunge. Remember a lower credit score means you’re deemed not creditworthy. Poor creditworthiness restricts the amount of loan you can access. Lender reject your applications when you have low credit score. Even if you manage to secure another loan, your interest rates are high and the repayment period short.
b) Additional Fees
Eventually, when you get back on your feet and can now start paying back your loan, you get additional fees on the remaining loan. This late fee is added by the lender as a penalty for defaulting on the loan. It’s the company policy and you must pay this added fee on top of the loan and interest rate charged.
When you default on a significant amount that the lender can’t let go and charge it as a loss, you can be sued. This happens because there is no asset to liquidate and recover the defaulted amount. Once the loan is brought before a judge, you’re called before them to determine if you have a legitimate reason for defaulting. You’ll be required to pay back the loan as soon as possible if there is no worthy reason for default. You might even get your salary attached to the loan as ordered by the judge to pay back the lender.
d) Reduced Loan Access
If you default on your loan, it is difficult to get credit from a different lender since the loan may be bad for your credit. The reduced access can affect you immensely especially when you need the money due to an emergency.
e) Dealing with Debt Collectors
Once the lender realizes you have no intention of paying back the loan, they sell it off at a lower rate to a debt collector to recoup some of the money. Dealing with the relentless calls of debt collectors can be unnerving as some even threaten you on the call. This constant harassment affects your daily productivity and results in stress.
The work of the collector is to make sure you pay back the loan and they can say whatever it takes to get you to do this. The best option is to converse with the debt collector and come up with a plan to help you make even small payments.
What to Do When you Can’t Pay
Talk to Your Lender
If the situation is temporary and can be fixed in a few months, then you can approach the lender and work out a favorable payment plan. If the amount is small, the lender may be more inclined to add you more time to pay back. With this, you have to pay more back due to the late fee charged on the loan due to late repayment. Having a good credit score comes in handy because you can use it to prove you’re trustworthy and are going to finish the loan as agreed. Having a legitimate reason for late repayment helps.
You might not be inclined to approach your lender to explain your situation so it’s best to pay less or pay late rather than default on the loan. When you have a late payment, try as much as possible to not surpass 30 days before making payments. This means the lender may not have time to report this to the credit bureau and have you listed as a defaulter. Being listed on this bureau can have lasting consequences on your financial status and access to future loans.
Cash In Your Insurance
When taking up a huge unsecured loan, you can opt to get insurance to protect it from defaulting. This means the insurance company comes in when you’re unable to keep paying the loan and clears the remaining amount. As you start making payment for your unsecured loan, your monthly costs go up due to added insurance premiums. But, it’s better safe than sorry. You can get a loan from an agent or opt for the one offered to you by the bank.
Secure Another Source of Income
You can opt to take up a side hustle or a second job. This means you get more income and can start paying back your loan. Ignoring it is not an option for it has adverse effects on your credit score and life in general. You have to pay it back to improve your credit score and get out of debt.
Avoid getting a loan to pay another loan for this only plunges you more into debt. With every added amount, the loan gets bigger and bigger. Interest rate increases as well. It’s better to secure another source of income to help you make payments. When dealing with a debt collector, you can even pay smaller amounts.
The truth is life is uncertain and no one can truly foretell what tomorrow holds. You might think you’ll be able to complete paying your loan in full but this can all change in the blink on an eye. This means you find yourself making late payments or completely defaulting on the loan. When this happens, it’s advisable to find a way of solving it before it gets out of hand.
You can opt to approach the lender and negotiate new terms of payment. Another option is to get an additional source of income. You can’t run away from the loan, eventually, you’ll have to pay it back. The best course of action is to come up with a plan on how to pay it back even if it’s at a later date. Find a positive way to act and not get more loans to pay back a loan. Check out our list of the Best Unsecured Loans.