When you apply for a loan, part of the credit checking process is effectively the lender assessing your ability to repay. If you have a strong credit history and a high credit score, lenders will probably decide that you are likely to be a good borrower and repay on time, based on how much you are looking to borrow and over what period. One of the benefits of applying for a personal loan is that you can decide how much you want to apply for and how long you want to pay it back. If your application is accepted, this degree of control means, at least when you take out the loan, you should know you are able to afford the repayments over the specified period.
Anyone can experience financial difficulties, and for a variety of reasons, which may mean you are unable to make some of your repayments on time. What are the consequences of this?
You’ll Hear from Your Creditor
The first thing you can expect to happen if you miss a payment is to receive a call and/or a letter from your creditor. You also may have incurred a charge depending on the terms of your credit agreement. If it is your first missed payment then you will be able to catch up by making the payment right away, along with any additional charge. Your creditor may also seek assurance from you that you will make all future payments on time, and if a payment has been missed due to a lack of a direct debit they may insist one is set up.
If you miss one payment but pay within a few days, this usually won’t be noted on your credit report, though you should still make a point of paying on time.
Paying Two Weeks Later & Damaging Your Credit Score
If your payment is more than two weeks late then a notice will be placed on your credit report, and your credit score will start to be affected. At this point, you will have received correspondence from your creditor on more than one occasion, and you might have even had an escalation letter beyond the standard request for payment. Some creditors will simply remind you that your payment is now overdue, and give you a specified period to catch up before taking further action. Note that if you are given time to pay a late payment will still be recorded on your credit report.
“If your payment is more than two weeks late then a notice will be placed on your credit report, and your credit score will start to be affected.”
Escalation & Default
If you fail to make payment with your creditor your account may then fall into default, this usually occurs when your payment is 60 days late. This is considered a serious financial matter, and having a default on your credit file can lead to difficulties in securing credit for a number of years. As well as sending you a default notice, you may also hear from your creditors’ collections department as they seek what they are owed. The collections department may wish to meet with you face to face to discuss your account, although you are under no obligation to do so and can correspond by telephone or in writing if you wish.
Your default notice will specify a time in which you need to make the necessary repayments and schedule future payments before the matter will escalate further.
Letter of Demand
A letter of demand will be sent following the expiration of the time specified on your default notice. The default notice will usually specify 30 or 60 days to pay, meaning when you receive a letter of demand you will be 90 to 120 days behind with your payment. When creditors reach this stage they will usually be seeking full payment of any outstanding amount. If you are not in a position to pay the full amount, you should still contact the creditor to try to come to a repayment arrangement.
“The default notice will usually specify 30 or 60 days to pay, meaning when you receive a letter of demand you will be 90 to 120 days behind with your payment.”
Court Action & Enforcement
Continuing failure to pay may result in your creditor escalating your account through the courts in order to legally enforce payment. Should you ignore the Statement of Claim from the court or admit to owing the debt, or contest the debt but the court finds in favour of the creditor, then you will need to repay. Whatever a judge decides you owe may include fees and interest from the last repayment due date.
Depending on your actions at this stage, you will at the very least have a court writ on your credit file, though if you still fail to pay the court may apply to have you declared bankrupt.
Missing Payments: It’s not worth it!
When you took out your loan, you did so with good intentions and planned to ensure you always made your repayments on time. If you are now facing financial difficulties and may struggle to make repayments, speak to your creditors to see what options and help they may be able to provide. This seems like an intimidating step, but many are surprised to find that creditors are sympathetic and reasonable when their customers face financial difficulties.
Missing payments and failing to repay your loan can have serious financial consequences both now and in future, and can damage your ability to acquire credit for many years.
DISCLAIMER: This article contains factual information and general comments only so does not take into account your objectives, financial situation or needs. Before taking any action, consider the appropriateness of this information having regard to your individual circumstances and always obtain and consider relevant disclosure documents before applying for a particular product.