What Is Loan Default? 5 TESTED Tips to Avoid Loan Defaulting
The defaulted loan is transferred to the debt collection agency, which then contacts the debtor and asks him to make the payment in full.
Do you have pending payments to make?
Are there any pending loans that need your immediate attention?
It is a cause of concern, as the inability to repay may lead to serious outcomes like the seizure of property.
Well, you can avoid it by undertaking certain practices. First, let us quickly discover loan defaulting in detail.
Loan default: What is it?
Loan default occurs when a borrower cannot pay the amount borrowed after a certain time mentioned in the loan agreement. In most cases, customers miss successive payments over weeks and months.
Although banks provide a grace period before penalising the borrower or seizing the belongings, failure to make the payment within that period makes the bank consider naming him/her on the list of defaulters.
This delinquency period is the only relief period that grants borrowers time to make the complete payment and escape the defaulter list.
Delinquency Period on Different Loan Type:
Different loans have different delinquency periods:
|Loan Type||The ultimate time to make the last payment||Grace period|
|Mortgage||30 days||15 days|
|Student Loan||270 days||90 days|
|Credit card||180 days||1 missed payment allowed before penalty imposition|
Defaulting on a loan should be avoided. If you miss a payment, the best thing to do is contact your lender early and revise the repayment terms.
Delinquency Vs. Default- Difference
While the two broad terms Delinquency and Default are both loan terms, they represent different degrees of the same issue: missed payments.
Let’s understand both terms.
Delinquency is a term that is used to describe a situation in which a borrower misses the due date of payment as student loans, home loans, credit card loans, or unsecured personal loans. The severity of delinquency is based on parameters like type of loan, duration of the loan, and the cause of delinquency.
For example, a merchant fails to pay his credit card dues in 4 days. His loan will remain in delinquent status until he either pays, delays or forbears the loan.
On the flip side, the loan enters the default arena if the borrower cannot pay the dues according to the terms listed in the promissory note. This involves missing payments over a certain period. In such a situation, the lender and the federal government allow a time-lapse period for the borrower before declaring him a defaulter. Under this, the borrower is guaranteed a repayment period of 270 days before being considered as a defaulter.
For example: Mr. Jeremy has failed to pay £2500, which he borrowed from the bank to meet his business needs. He failed to make consistent payments on the due date and eventually entered the time-lapse period where he had to pay the complete amount within 270 days. He pays off the debt and escapes the penalty that proceeds after being considered as a defaulter.
In this way, he saved his pricey assets- property and other belongings- from getting seized by the bank.
To avoid being robbed of your pricy possessions, you should-AVOID LOAN DEFAULTING AT EVERY COST!
Here is how you can!
5 Tested Tips to Avoid Loan Defaulting
The first and foremost thing to do is determine the urgency of the reason for which you need the loan.
You can avoid loan defaulting by considering few stages of financing:
1)Prepare a budget
Well, yes, one lives only once and shouldn’t deprive us of any earthly pleasure. A budget must be prepared every month. A specific amount should be saved for meeting the urgent expenses and the luxury ones. It will help you manage finances and leave enough money on the table for you to get rid of financial crunches. (Contextual linking- How to budget for big expenses-blog)
2)Evaluate loan repayment capacity before filing a loan
Before applying for a loan, evaluate and analyse how much you can afford to pay back after completing the loan tenure. Analyse the terms and conditions before finalising them.
Things to consider before taking up a loan:
- Do you have a stable income source?
- Consider all the charges and fees on the loan
If you have over one debt, then analysing the debts is a wise decision before taking up another loan. Create a list of the amount taken, amount due, repayment dates, and the type of debt.
Analyze the list and take loans sagaciously
How do I find out about pending debts?
- Check your bank account using debit cards
- With online banking, you can check statements
4)Keep updated with the Credit Score
Credit Score determines the lender’s ability to lend funds to the one who needs them. Hence, it is imperative to maintain a good credit score.
For example: In the UK, 721-880 is considered a good credit score.
Benefits of a good credit score:
- Significant savings on high-interest loans
- Better terms and loan availability
- Security deposit waivers
- Credit rewards
- Hassle-free approval for rental properties
5)Streamline Borrowing Process
Most borrowers file for larger loans than they actually need. It’s stressful. And it may lead to insolvency.
How to evaluate the exact amount you need?
- Set your budget: determine where and how much money you need to save and use
- Define outcomes: What is the purpose of taking the loan?
- Consolidate debts: how much do you need to pay existing debts, or you should go for debt refinancing?
You can try shifting multiple credit cards to a single bank. This will help you grab a loan at a low-interest rate.
Borrowing grants is the key to rationalising dreams and is simultaneously beneficial to the lender. Evaluate your needs, goals, repayment capability, and credit score before seeking a loan. These simple practices can help you avoid loan defaults, losing collateral and ensure financial well-being.