10 Consequences of Defaulting on a Loan


Consequences of Defaulting on a Loan

The consequences of defaulting on a loan are serious. Defaulting on a loan can lead to higher interest rates in the future, damage your credit score, and risk damaging your relationships with family and friends.

Unfortunately, defaulting on a loan is not uncommon. According to the Federal Reserve, the total amount of delinquent consumer debt in the United States was $1.53 trillion in 2018, with over 11 million Americans having defaulted on their loans.

Whether you’ve missed a payment or failed to repay the full amount, defaulting on a loan can have a far-reaching impact. Here are 10 of the most common and significant consequences that result from defaulting on a loan.

Damaged Credit Score

Defaulting on a loan can have a significant impact on your credit score and creditworthiness. A single missed payment can cause your credit score to drop by as much as 100 points, while a full default can cause it to plummet by hundreds of points.

Higher Interest Rates

Approval for loans and credit cards will be more difficult. Banks and lenders will be less likely to approve you for a loan if you have a history of defaulting on loans. This means you will have higher interest rates and more fees.

Difficulty Obtaining New Credit

Defaulting on a loan will make approval for new credit cards or loans more difficult. Viewed as a higher risk by banks and lenders,  you will pay higher interest rates and fees.

Collection Agency Involvement

If you default on a loan, the lender will likely send your debt to a collection agency. Collection agencies can be very aggressive when it comes to recovering debt and may contact you multiple times a day.

Wage Garnishment

A lender may get a court order to garnish your wages, with the lender directly taking a portion of your wages until your debt is fully paid.

Bank Account Seizure

In some cases, a lender may get a court order to seize your bank account, taking all of your money in your account to pay off your debt.

Legal Action

If you don’t pay your debt, the lender may take legal action against you. This could result in a judgment being placed against you, which could lead to wage garnishment or bank account seizure.

Damaged Relationships

Defaulting on a loan can cause tension in your relationships with family and friends. If a relative or friend has co-signed a loan, they will be left with a financial burden if you default on the loan.

Higher Insurance Premiums

Defaulting on a loan can also lead to higher insurance premiums, as most insurance companies consider people with a history of loan defaults to be a higher risk.

Lower Self-Esteem

Finally, defaulting on a loan can take a toll on your self-esteem. It can be embarrassing and can make you feel like a financial failure.

Defaulting on a loan can have several serious penalties, from damage to your credit score to difficulty obtaining new credit to legal action. It’s important to understand the consequences of defaulting on a loan before you take on additional debt. If you’re struggling to make payments, contact your lender and discuss your options.


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