Taking out any loan or payment plan is a significant financial commitment that needs careful consideration and responsibility. While we hope that it never happens, it’s important to know what occurs if you ever default on your payments.
What is defaulting?
Defaulting is a situation that no borrower wants to find themselves in. It is more serious than missing a single payment - defaulting occurs when the agreed-upon terms of the financing agreement are not met. This might be caused by failing to correct missed payments after a set period of time, failing to pay your total amount owed, or violating other terms outlined in your financing documents.
If you are worried you might miss an upcoming payment, please review our article here about what to do. Remember that missing a payment is not yet a default, and by reaching out to your servicer, you can avoid default.
Immediate consequences
The immediate consequences of defaulting can be severe and can vary depending on your loan or payment plan. Here are some familiar, yet sobering, repercussions that you should know about:
Impact on credit score: Defaulting on a loan could significantly damage your credit score, to a much larger degree than missing a payment. A lower credit score can make future loans you take out for purchases like a house or a car more expensive through higher interest rates or higher fees, costing you money in the long run, and it can even lead to you being turned down for these purchases.
Acceleration of debt: In many financing agreements, default triggers a lender’s right to demand immediate repayment of the entire balance that you owe (including any accrued interest). This means that if you default on your loan, a lender or a debt collector could require you to pay back the entire amount all at once. For specific terms associated with your loan or payment plan, please review your agreement.
Additional fees, penalties, and collection costs: Lenders sometimes add late fees and penalties on missed payments as well as defaults, and sometimes the costs associated with collecting on a loan are charged to you. These fees can add up, making it difficult to recover from a financial burden. Again, for specific terms associated with your loan or payment plan, it’s important to carefully review and understand your agreement.
Legal action: In some cases, a lender might consider legal action against you to recover the amount of a defaulted loan. If legal action is taken, this could potentially result in court judgements that grant the lender the amount you owe them.
Long-term consequences
The consequences of default extend beyond immediate financial penalties.
Difficulty obtaining credit in the future: Credit scores are necessary for many aspects of day-to-day life, like opening credit cards, getting a mortgage, or possibly buying a car. A default can stay on your credit report for several years, making it more expensive or difficult to qualify for credit in the future.
Limited financial options: A default on your record can limit your financial flexibility and make it harder to achieve your long-term financial goals.
What if I’m worried about defaulting?
The important thing to remember is that defaulting is more serious than just missing a payment, and that default is avoidable even if you don’t have the means to make a payment right now. Communicating with your servicer goes a long way to helping you stay out of default.
The most important thing to do if you’re worried about missing a payment is to communicate with your servicer. They can potentially help you avoid late fees, avoid damage to your credit score, and restructure your repayments even if you can’t meet your payment obligations right now.
If you’re worried about missing an upcoming payment, please take some time to review our article here with more information. Remember that missing a payment is not default, and you still have options to avoid default.
If you have more questions about what happens if you default, please reach out to Fortify support, and we’ll do our best to help.