Loan Defaults: Types, Functionalities & Getting Out of One
Taking a loan could be a smart decision if done right. It could help you reach your dreams faster, purchase that much-needed asset, pay medical bills, tuition, and so on. However, sometimes, unforeseen events happen–you lose your job, your business goes under, and unexpected expenses pop up. Before you know it, you are struggling to keep up with your loan payments.
This is where loan defaults come in. When you are unable to service your loan, you fall back on your payment schedule. In this article, we will look at different types of loan defaults, their functionalities, and how to get out of them.
Types of Loan Default
There are two types of loan default: technical default and payment default. Technical default occurs when you breach the terms and conditions of your loan agreement, such as not maintaining a particular credit score or collateral.
Payment default, on the other hand, takes place when you fail to pay your installments on time. Taking a technical default may often lead to payment default.
Functionalities of Defaulting on a Loan
Defaulting on a loan can negatively impact your finances, as it comes with severe financial consequences. It affects your credit score, which could impact your loan eligibility in the future. Your lender could report your payment default, leading to a bad credit history.
Defaulting may lead to increased interest rates on your loan, late payment fees, litigation, and harassment by debt collectors. Even foreclosure of your collateral.
Getting Out of Loan Default
Getting out of loan default should be your priority when you notice that it is impacting your finances negatively. Below, we will explore how to get out of loan defaults.
Understand the Terms & Conditions of Your Payment Plan
Go through your loan agreement and understand your payment plan. You can contact your lender to ask about possible restructures and repayment options.
Negotiate With Your Lender
Get in touch with your lender and propose a repayment plan that suits your financial situation. Ask for a review of your interest rate and a possible freeze on your late-payment penalties.
Increase Your Income
Increasing your income is one of the easiest ways to pay your loans faster. Look for a part-time job or sell some of your assets to boost your income.
Seek Free Financial Counseling
There are several free financial counseling services that can provide you with debt management plans and advice on getting out of debt.
File for Bankruptcy
If all other options fail, you can consider filing for bankruptcy. Bankruptcy can help you rebuild your finances and discharge your unsecured debts.
Loan default could put you in financial distress if not adequately managed. Understanding the types, functionalities, and how to get out of it is essential. Always communicate with your lender and seek professional advice before taking any drastic steps.
Remember, getting out of a loan default may take some time and sacrifices – but is worth it in the long run.
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