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Your credit score and credit history are important for many reasons, but this is especially true when it comes to applying for additional credit or loans. If your credit history is riddled with missed payments or defaulted loans, it will be difficult for you to be approved for competitive interest rates and terms for future loans or credit cards that you apply for – this that is, 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 spending a month on your credit card
And what’s worse 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 fail to repay a loan can help you manage your finances smarter. Here’s 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 may be subject to penalties and fees,” said Josh Zimmelman, chief executive of Westwood Tax and Consulting. “However, most lenders give a grace period after missing a payment.
“However, if repayments are not made for a certain period of time (the delinquency period), the loan will be in 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 significantly lower your credit score and hurt your chances of receiving future loans or other credit. If you let it go on too long, they may even be able to garnish your wages or personal assets to pay off debts.
The exact chain of events that will occur depends on the type of loan for which you miss a payment or default. Here are some examples of different types of loans and their consequences.
“When you miss a payment, you can expect late fees, starting at around 3%,” said Andrina Valdes, COO of Cornerstone Home Lending, Inc. “Default describes the delay in your payments. Generally, 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 delinquency period than other types of loans,” said Anna Serio, Loan Expert and Certified Business Loan Expert with Searcher. “Your service agent will not report your loan as past due until 90 days after you miss a payment. Federal student loans are also not in default until you miss the 270 day payments.
“The first thing that will happen is that you will be deemed ineligible for any future loans,” said Anthony Martin, CEO of Mutual Choice and a member of the financial advisory board of Forbes. “The second is acceleration, which is when your full loan amount is considered delinquent – something that could really cause financial trouble. You could rehabilitate your federal student loan and then work on the repayment.
“A car loan is past due the day a payment is late,” said Omer Reiner, licensed real estate agent and president of Home Buyers FL Cash, LLC. “This could cause the lender to send notices to the car owner and in most situations late fees will apply. A car loan is in default when the borrower is more than 30 days behind on payment. This can impact credit rating and repossession of the car without notice.
“A credit card loan can be past due on the first day a payment is late, but it can take up to 30 days for the credit card to be past due,” 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 default to the credit bureau. A default is when the borrower is more than six months behind on payments. The credit card company will close your account and sell the debt to a collection agency where interest rates will be very high.
Steps to get back on track after missing a payment
While you can’t help but miss a payment, it’s important to be proactive if you do and to avoid letting your loan go into default.
“First, if you miss a payment — it happens to everyone — try to make that payment before the loan is 30 days overdue,” said Matt Sexton, small business financial analyst and writer. at Adapting small businesses. “If you can update your account before it’s 30 days past due, it won’t be reported to the credit bureaus and won’t affect your credit score.
“If you’re in a temporary financial crisis that might delay a payment or two, try to keep those late payments on as few accounts as possible. A 45-day late payment on one account is better than 30 days late on three or four accounts.This will have a greater impact on your credit score.
“Especially with the ongoing pandemic, if things get difficult financially, contact your lender. There are tools in place, payment extensions, for example, to help those struggling in the short term. If you have a long-standing relationship with your lender, chances are they’re trying to find a way to help you keep your credit strong.
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