What Happens If You Default on a Personal Loan?

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Banks, credit unions, other business entities and individuals enter into personal loan agreements with consumers across the U.S. by preparing loan contracts that the borrower must sign. If you default on a personal loan you must deal with the consequences of doing so, which range from a decreased credit score to legal action.

Credit Scores

Lenders share information on open credit products with Equifax, Experian and TransUnion on a monthly basis. Timely payments are reported, as are late payments. The three bureaus keep track of payments that are delinquent by 30, 60, 90 and 120 days. Records of these late pays stay on file for up to seven years, as do records detailing loan defaults. Credit history amounts to 35 percent of an individual's credit score, so a personal loan default can cause that score to plummet.

Limited Ability to Borrow

Lenders are reluctant to lend money in the form of personal loans, credit cards, mortgages and other types of debt to people with low credit scores. Where loans are made, the interest rates are usually much higher than average. Additionally, insurance companies check credit scores when issuing life, homeowners and automobile insurance. People with low scores are denied coverage or forced to pay much higher premiums than people with average or above average credit scores.

Debt Collectors

Financial institutions usually contract debt collection agencies to try and collect money owed by people who default on loans. Legally, debt collectors can call you any time between 8 a.m. and 9 p.m. on any day of the week. They can also call you at work unless you have instructed them orally or in writing not to do so. Debt collectors cannot divulge your debt information to other people, but can contact friends and relatives to try to locate you if you do not respond to their calls.

Garnishments

State laws vary on the rights of creditors to place garnishments on wages, but in many instances creditors can file a civil suit in the local county court against anyone who defaults on a debt. The county court can instruct the debtor's employer or bank to garnish future wages and send the funds to the creditor. If you fail to attend a court hearing, you cannot contest a garnishment. Federal law forbids garnishment of some sources of income such as Social Security benefits.

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