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You might have had every good intention of paying back the loan you needed when you were tight on cash. But now you might have fallen behind on the payments or you cannot catch up anytime soon. Whether the loan came from a traditional bank or an online lender, here is what happens when you default on a loan.
Lenders have their own guidelines for considering when a loan is considered to be defaulted. Some take action when you miss one payment, others will wait months. As time goes by the communication will become more aggressive. When payments are missed in 30 days or less, a lender might contact the credit bureaus which can cause the borrower’s credit score to begin to decline.
How Repayment Works
You probably put up some kind of collateral to qualify for the money if the loans are secured. So when you default you lose the collateral. Sometimes small business loans require you to provide collateral in order to be approve for the loan. If the only way for a company to recoup the loan and interest form you is to seize the collateral, they will.
If you had an unsecured loan, you did not put up any collateral for the loan. If you are behind on payments, the lender might begin adding fees and increasing the interest rate. If the lender considers a debt in default, the loan may be turned over to a collection agency. If the collection agency is unsuccessful in securing a loan repayment, the agency can take the matter to court and pursue avenues like garnishing wages or putting a lien on a borrower’s home.
Problems After Defaulting on a Loan
The credit score of the borrower will drop after defaulting on a loan which makes it harder to secure credit in the future. The interest rate will be a lot higher even if a lender is willing to take a risk on someone who defaulted on a loan, especially for someone with good credit.
If you turned to merchant cash advance for funding, the lender purchased a portion of your future revenue. You can always negotiate to change the terms if repayment is too much of a burden. If you close your business the payments end because there are no future revenues to collect.
How You Can Avoid Defaulting on a Loan
If you know that your finances are going to prevent you from making payments on a loan, it is best to get in touch with the lender before the situation gets worse. The lender wants their money back if it takes longer than the original term of the loan and may be willing to set up a payment schedule that works with your budget. Another option might be to secure a line of credit from another lender to meet its obligations when cash flow is tight.
Filing for Bankruptcy
Filing for chapter 7 bankruptcy is way to satisfy creditors and does not eliminate all problems that come with defaulted loans. In the case of secured loans, the bankruptcy filing may eliminate the amount of the debt, but the lender is still free to seize your home or your car if they were offered up as collateral.
If you default on an SBA loan, it is similar to defaulting on any type of secured loan. The SBA did not lend you money, but it did guarantee its repayment. The lender will collect what it can and file an insurance claim. Most of the time business owners offer collateral for their SBA loans so the lender will want that collateral to make up for lost payments.
