More and more Americans are going all in for personal loans. In 2019, the amount of outstanding personal debt held by Americans surged to $138 billion – a record high.
If you’re anything like the average American, you certainly have a personal loan.
For starters, debt isn’t a bad thing. A loan can help you get out of a financial emergency and, for most people, it’s the only way to afford a car or a house.
But if you fail to pay off your loans, things can take a bad turn.
Continue reading to learn the consequences of having an unpaid debt.
How Does One End Up with Unpaid Debt?
Before we look into what happens when you don’t pay a debt, it’s important to establish how you might end up with unpaid debt in the first place.
No one applies for a loan with the intention of defaulting on it. Lenders do a thorough risk assessment to ensure borrowers who are not likely to pay off their loans don’t get approved.
But life happens.
You can lose your primary source of income. You can be fired from the work or your employer can shut down the business, rendering you jobless. If you were running your own company, the business can fail. Without a reliable source of income, you might not be able to pay off your debt.
A serious healthcare issue can also leave you unable to service your debt. You could spend most of your income on healthcare bills, especially if you have inadequate health insurance. An illness can also keep you out of work for a long time, meaning you won’t be in a position to earn an income, particularly if you’re self-employed.
Now that you know how you can end up with unpaid debt, let’s focus on the consequences.
Your Credit Score Will Fall
Lenders use your credit score to assess your creditworthiness.
If you have good or excellent credit, you’re a low-risk consumer. You’ll get approved for loans at lower or friendly interest rates.
If you have bad or poor credit, most traditional lenders will reject your application or approve but with stricter terms and conditions, such as shorter repayment periods and higher interest rates.
As such, it’s in your best interest to maintain good credit. But if you don’t pay a debt, your credit score will start falling.
Here’s how it happens.
Let’s say you’ve just taken out a $1,000 personal loan from your local bank. You’re required to make monthly repayments for one year. All goes well until the fifth month when you lose your job.
As a result of the job loss, you’re unable to make a payment. Your lender will get in touch to remind you of the unpaid installment. The sixth month goes and you’re yet to catch up with the payments.
If the lender reports these missed payments to credit bureaus, your credit will take a hit. It will fall even lower if you let the account go into collections.
You’ll Start Dealing with a Debt Collection Agency
Debt collection policies vary from lender to lender.
Some lenders will sell your account to a collection agency three months after a loan goes into default, others take a bit longer. Other lenders have internal debt collection departments.
Either way, if you default on a loan long enough, a debt collector will be in touch with you. Your lender will probably notify you that the account has been handed over to a collection agency.
Now, collection agencies don’t have a reputation for politeness or patience. They’ll be relentless in their pursuit of the money you owe. Their pressure tactics alone can get you devising a plan to pay back the debt as soon as possible.
The good news is debt collection agencies must adhere to the Fair Debt Collection Practices Act, which is a federal law. This means the collectors cannot harass or threaten you, publish your details on a public platform, or call you outside of the hours set by law. If a collector violates your rights, you can file a complaint with the Consumer Protection Bureau or sue them in a court of law.
You Could Face a Lawsuit
A debt collection agency won’t necessarily get you to pay off a debt. If you simply don’t have any money, there’s little you can do. Collectors will typically back off when they realize their efforts are hitting a dead end.
This, however, doesn’t mean your loan will vanish into thin air.
A creditor can file a lawsuit and win a money judgment against you. When this happens, they’ll have the right to come after your assets or income, even if the loan was unsecured.
You Could Lose Your Collateral
If you go in for a secured loan, you’ll have to attach collateral, such as a car or house title. The collateral must be at least equal in value to the amount of money you’re seeking.
If you default on a secured loan, the lender has the legal right to initiate a repossession process. You stand to lose your asset, regardless of the amount you had already paid off.
In some states, secured creditors don’t have to obtain a court order to repossess the asset. If the collateral was a car, for instance, a repo man will just trace it and impound it without your consent. And, if the lender doesn’t recoup the entire outstanding amount, including repossession charges, after selling off the asset, you’ll still owe them the balance.
It’s essential to note that most lenders rarely want to repossess your collateral unless it’s the only option. It costs time and money to complete the process, so it’s possible to work out a repayment plan that suits your financial situation.
Also, keep in mind a repossession or foreclosure will stay on your credit report for about seven years. This will adversely affect your ability to get another loan within this period.
Unpaid Debt Can Make a Bad Situation Worse
Loans are part of life. Although you hope to pay them off on time, sometimes it’s not possible to keep up. Unfortunately, unpaid debt can really make your life more miserable. From having creditors and collection agencies on your back to facing the prospect of lawsuits, things will go quickly from bad to worse for you.
Whatever situation you’re in, know that you can always get help. At Bonsai Finance, we’ll connect you with lenders and resources to help you climb out of debt.