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Your credit rating and credit history are important for many reasons, but this is especially true when it comes to applying for credit or additional loans. If your credit history is riddled with missed payments or delinquent loans, it will be difficult for you to get approved for competitive interest rates and terms for any future loans or credit cards you apply for, that is – ie if you are approved at all.
See: What not to do when trying to get out of debt
Read: 10 ways to bounce back from a month of heavy spending on your credit card
And the worst part is that the consequences of missing payments or defaults can negatively affect your credit for up to seven years. Being aware of what happens when you miss a payment or default on a loan can help you manage your finances better. Here is what you need to know.
What happens if you miss a payment or default on a loan?
“If you miss a payment or make a late payment on a loan, you could be subject to penalties and fees,” said Josh Zimmelman, managing director of Westwood Tax & Consulting. “However, most lenders give a grace period after missing a payment.
“However, if the repayments are not made for a certain period (the default period), the loan will default. When a loan is in default, it is sent to an agency who will contact you to receive the funds. Defaulting on a loan can dramatically lower your credit rating and hurt your chances of getting future loans or other credits. If you let it go too long, they might even be able to seize your salary or personal property to pay off debts. “
The exact chain of events that will occur depends on the type of loan you are missing a payment for or for which you are in default. Here are some examples of different types of loans and their consequences.
“When you miss a payment, you can expect late fees, starting around 3%,” said Andrina Valdes, COO of Cornerstone Home Lending, Inc. “Default describes the delay in your payments. Typically, a loan will not be foreclosed until payments are more than four months (120 days) past due.
Federal student loans
“Federal student loans have a longer default period than other types of loans,” said Anna Serio, loan expert and certified commercial lending expert with Searcher. “Your agent will not report your loan as past due until 90 days after you miss a payment. Federal student loans are also not in arrears until you miss the 270-day payments.
“The first thing that will happen is that you will be considered ineligible for any future loan,” said Anthony Martin, CEO of Mutual of choice and member of the Forbes Financial Council. “The second is acceleration, which is when your entire loan amount is considered past due, which could really lead to financial problems. You could rehabilitate your federal student loan and then work on the repayment. “
“A car loan is past due the day a payment is overdue,” said Omer Reiner, licensed real estate agent and president of FL Cash Home Buyers, LLC. “This could cause the lender to send notices to the car owner and in most cases late fees are charged. An auto loan is in default when the borrower is over 30 days in arrears. This can impact the credit rating and repossession of the car without notice. “
“A credit card loan can be in arrears on the first day of late payment, but it can take up to 30 days for the credit card to be in default,” Reiner said. “Late fees and an APR penalty may be applied to the credit card. It can take up to 60 days for the credit card company to report the delinquency to the credit bureau. A default occurs when the borrower is more than six months late on payments. The credit card company will close your account and sell the debt to a collection agency where the interest rates will be very high.
Steps to get back on track after missing a payment
While you may not be able to help miss a payment, it’s important to be proactive if you do, and to avoid letting your loan go to default.
“First of all, if you miss a payment – it happens to everyone – try to make that payment before the loan is 30 days past due,” said Matt Sexton, financial analyst and small business writer. companies. Suitable for small businesses. “If you can update your account before it’s 30 days overdue, it won’t be reported to the credit bureaus and will not affect your credit score.
“If you are in a temporary financial crisis that could delay a payment or two, try to keep those delayed payments on as few accounts as possible. A 45-day late payment on one account is better than a 30-day late payment on three or four accounts. This will have a bigger impact on your credit score.
“Especially with the ongoing pandemic, if the going gets tough financially, contact your lender. There are tools in place, payment extensions, for example, to help those who are having short-term difficulties. If you have a long-standing relationship with your lender, chances are they are trying to find a way to help you keep your credit strong.
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