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A loan default can seriously damage your credit score. Also, if your loan is secure (meaning it is backed by property such as real estate or a vehicle), defaulting on the loan can lead to foreclosure or repossession of that property. When you default on an unsecured loan such as credit card debt, you’ll usually have to deal with extra fees and with collection agencies.
Defaulting on a loan can feel overwhelming, but there are things you can do to dig yourself out.
Before your loan goes into default
Look out for a default notice
Before your loan actually goes into default, creditors will send you a notice of default. This is basically a warning letter to let you know you’re behind on your payments and your loan is about to go into default. Lenders send this notice after you’ve missed three to six months of payments.
The letter is basically your last chance to catch up with your payments before the loan defaults.
If you’ve received a default notice, contact your debtor to see what you can do. Some debtors might agree to let you pay in smaller instalments, while others might demand that you pay the amount in full and cancel any previous arrangement.
If you are unable to pay your debt, contact a debt charity such as StepChange for free debt advice.
Whatever you do, don’t ignore the default notice. If you don’t respond within 14 days, your loan will go into default. This could lead to court action and will affect your credit score.
Get credit counselling
A credit counsellor can help you figure out your finances so you can deal with any remaining debt. While this will not solve the loan default you already have, it will help you stay current on other debts so you can start repairing your credit score. If you have trouble with budgeting, counsellors can also help you figure out how to manage your money better.
In addition to StepChange, the National Debtline also offers free phone and chat assistance for people trying to deal with their debts.
When your loan is in default
Wait for a debt collector to contact you
Once a loan goes into default, the debt can be sold to a debt collector. The collection agency will then contact you to try to get the money. The agency will often ask for a higher amount than the original debt, as fees are often added to the total.
At this point, you can try to negotiate a settlement, where you make a one-time discounted payment to settle the debt. Or you can try arranging a repayment plan. Even if you pay, however, the loan default will still appear in your credit record.
Work to clean your credit record
Defaults show up on your credit report for six years, even if you end up paying the loan in full. While there’s nothing you can do to remove details of the default faster, you can add a notice of correction on your credit report. This allows you to briefly explain why you defaulted.
For example, you can mention that you lost your job or were injured and were unable to make payments on time. You should do this individually with all three credit reporting agencies: Experian, Equifax and TransUnion.
Explaining why you defaulted won’t improve your credit score but might make future lenders less concerned about your ability to pay.
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