Defaulting on a loan or credit card is serious business. If you fail to make payments on your debts, you may be contacted by a collection agency and even taken to court. Here are some other consequences of defaulting on a loan or credit agreement.
Collection costs In addition to the amount you owe, you will probably also have to pay collection fees to the collection agency that handles your case.
Acceleration Depending on what kind of loan you have, if you default, your lender can accelerate the terms of your loan, which means that the entire amount can be made due by the next scheduled payment.
Increased interest rates You also run the risk of having your interest rates increased, not only for the loan or line of credit on which you have defaulted, but for other credit cards and loans as well. Lenders use increased interest rates to offset the risk of lending to you. By defaulting, you prove that you indeed run the risk of not repaying your debts, so your interest rates can be raised.
Lowered credit score Defaulting on a loan can seriously affect your credit report and your credit score, so it can be quite difficult to get other loans or lines of credit. This can be especially hard to face if you are planning on getting student loans for your children to go to college, or if you wanted to buy a house or a car. Lenders use your credit report and credit score as a general indicator of creditworthiness, so if you default on one loan or credit card, they might think that you will also fail to repay them, which can cost them a great deal of money.
Wage garnishment In order to repay your debt, the government may be able to keep a portion of your income. This can make your budgeting especially tight because you will have even less money for the things you want and need.
You can avoid defaulting on a loan or a credit agreement by educating yourself and knowing how much you can afford. For instance, to avoid defaulting on a mortgage, know what the different types of mortgage products mean for your finances. That way, you won’t be tempted by offers for low monthly payments that drastically increase after five or ten years. Also make a commitment to yourself to only charge what you can afford to repay. Always pay on time and if you have pre-existing debt, at the very least, make your minimum payment.
If you are coming dangerously close to defaulting, talk to your lender or credit card company. You might be able to arrange a different repayment plan, consolidate your debt or arrange for deferment. You can also look into credit counseling so that you can make a plan that you can manage without defaulting.