Defaulting on a loan essentially means you've stopped making payments on a loan according to the agreed terms. In general, defaulting on a loan can damage your credit and threaten your overall financial health.
What Happens When You Default on a Loan?
The terms and consequences of a default depend on the type of a loan you have. Here's what to expect based on the type of loan.
a). Secured Loans
Secured loans are backed by some form of collateral. If you default, the lender will typically use the collateral to pay off the remaining balance.
b). Unsecured Loans
With secured loans, a lender's recourse is pretty straightforward because you pledged collateral when you first applied for the loan, which the lender could tap if you default.
However, with unsecured loans like the ones issued by among other digital lenders M-Shwari, OKash, CreditHela and OPesa, it is a bit different.
Generally, what happens if you stop making payments on a digital loan, the lender will typically send your account to the in-house collection department or a collection agency.
What Is the Difference Between Default and Delinquency?
If you're behind on your payments, loan delinquency and default are two consequences you'll face.
Delinquency begins the moment you've missed a payment. You'll typically be charged a late fee, and your lender will begin to make collection attempts.
You may be considered delinquent for anywhere between 30 and 90 days—and sometimes longer—before the lender considers you to be in default.
When the lender determines you are in default, typically collection attempts begin in earnest, either through the lender's own collection department or a third-party agency.
How Does a Defaulted Loan Affect Credit?
Defaulting on a loan can not only have serious immediate financial repercussions, but also some long-term consequences.
When you're delinquent on a loan or for at least 30 days, that late payment will be reported to the credit bureaus and will remain on your credit report for seven years. Once you default, that is also reported to the credit reporting agencies as a collection account, which will also typically remain on your credit report for seven years.
With a default on your credit report, it can be challenging to get approved for credit in the future. That's because a lender's primary concern is repayment, and if your credit report indicates that you've failed to do that in the past, the lender may consider you to be too much of a risk.
How to Avoid Defaulting on a Loan
Because defaulting on a loan can have long-term ramifications, it's best to try to do whatever you can to avoid it in the first place. Here are some tips that can help:
a). Talk with your lender.
Default isn't just expensive for you, it's expensive for lenders too. That's why many like CreditHela are always willing to work with struggling borrowers to help them avoid default. If you're delinquent or worried about missing an upcoming payment, talk with your lender to try to come up with a modified payment plan.
b). Ask about deferment options.
With some loan types, you may be able to request deferment if you're experiencing financial hardship. Deferment can give you some reprieve from your regular payments for a time while you work to get back on your feet financially.