Defaulting on a loan can have serious consequences, including a substantial drop in your credit score, higher interest rates on future loans, and the possibility of legal action. Here are some of the potential outcomes of defaulting on a loan:
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Credit Score: Defaulting on a loan will cause a substantial drop in your credit score, which can make it more difficult to obtain credit in the future.
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Interest Rates: Defaulting on a loan can result in higher interest rates on future loans, as lenders may view you as a higher risk borrower.
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Debt Collection: When you default on a loan, your account may be sent to a debt collection agency that tries to recover your outstanding payments. You may receive a stream of communications from the lender as the account goes 30, 60 and 90 days past due. Then one day, the calls and letters may stop altogether. At that point, it can be tempting to think your lender has forgiven the debt, but don’t be fooled. In reality, the lender has probably sold the debt to a collection agency that will soon come after you for the money.
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Legal Action: In certain extreme cases, defaulting on a loan may result in legal action, such as wage garnishments or lawsuits.
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Collateral: If the loan is secured by an asset such as your car, savings or investment accounts, the lender has the right to seize the asset to recover its losses, as stated in the loan agreement.
If you default on a loan, its important to take action as soon as possible. Contact the lender and explain your situation. Some lenders may offer short-term payment relief, and being proactive can help mitigate the damage to your credit score.
