What Happens When a Loan Defaults?

MCO-related financial aid has helped keep loan default fears away for now, but we must continue to keep an eye on our debts for when the pandemic (eventually) ends. We must have a plan in place to avoid falling into financial ruin when repayment begins again. The last thing you want is for a loan to default. 

What is a Default?

Put simply, a loan defaults when the borrower misses, avoids, or fails to make timely payments, including interest or principal. This applies to both secured and unsecured loans. 

Loan defaults lead to a number of severe consequences, depending on the type of loan. The most severe consequences include lower credit scores, lowered chances of obtaining future credit, and raised interest rates on existing and future debts.

Make sure you know how long your grace period is for repayment, and seek help if you feel you have trouble repaying! 

How Defaults Can Affect You

Mortgage Loans

The bank will send a court order to have the borrower’s house auctioned. The debtor will lose their house and any equity they established. Until the home loan is paid off in full, the house belongs to the bank

Auto Loans

Similar to housing loan default, the car or vehicle in question will be repossessed. Debtors will have to get used to walking or e-hailing again until they can manage to repay the full loan and hope no one purchases it from the bank beforehand. 

Credit Card 

A credit card is actually a tool for loans, remember when you’re buying with a credit card, you are borrowing from the bank. When debts cannot be paid, there is grounds for a lawsuit, but why on earth would they sue someone who has no money? 

There are other ways banks can try to get back their money. A wage garnishment may be applied. This is when the debtor’s paycheck is partially withheld legally and given to the lender until the debt is repaid. Otherwise, they could freeze all the money in your bank account. 

Secured Loans

Secured loans contain an asset provided by the borrower as collateral, which could be a car, house, cash, bonds etc. When the loan defaults, the lender simply seizes the asset. 

Unsecured Personal or Business Loans

Just because there is no collateral doesn’t mean the debtor is off the hook. Without a collateral, there is grounds for a lawsuit, in which the worst case scenario is wage or revenue garnishment. One way or another, the bank will reclaim their money. 

Other Possible Consequences

You’ll Have to Pay a Lot More

When you skip payments, you are actually also accumulating extra charges, particularly from compounding interests. 

While it seems counterproductive to pile on extra fees for someone unable to repay their debts, this is the reality of many banks. So, making repayments on time is crucial. 

No More Financial Help

When loans default, your credit score is pretty much also ruined, so you won’t be able to apply for any future credit or financial help from banks or licensed lenders in the future.

Once you get labeled a high risk borrower, it is tough to get back on track, so make sure it doesn’t happen!

Bankruptcy

This is the absolute worst thing that can happen, but failure to repay a loan can result in bankruptcy. 

A bankrupt person or entity will have their assets managed by a Director General of Insolvency (DGI) for repayment. He or she will also be banned from leaving the country, withdrawing money or spending more than RM1,000, and they will have to sacrifice a percentage of their salaries each month. 

Need Help Settling Unsecured Debts? 

At IBPO, we can help you if you’re struggling to pay off heavy unsecured debts like credit card payments. 

Our i-Debt Management programme has been known to reduce existing loan interest rates to as low as 6% p.a. and reduce monthly commitments by up to 70%. 

In addition, our expert financial consultants will advise you on your next move and how to manage your finances better in the future.

For more information, visit i-Debt Management.