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Before Neglecting Your Loans: Know the Penalties and What To Do

balance your income and loans

Whether your loan was accrued to buy a house, car or education, you still owe something. Being in debt doesn’t feel oppressive only because of the size of the balance, it also feels that way because of the risk of missing a payment.

Penalties for neglecting your loans vary, but all lenders agree that the earlier you communicate with them, the more options you’ll have.

People miss loan payments for many reasons. You don’t want to neglect your loans, but sometimes a surprise medical need disrupts your flow of income. Other times, an impulse buy catches up with you, and suddenly you have more bills to pay than you had calculated. Or perhaps you have plenty of cash, and just didn’t realize the due date for a particular payment had passed.

Here are the most common loans and the consequences for missing payments on each:

Credit Card Debt

Your credit card balance can be pesky on its own, but when you fall behind on payments, a vicious cycle can begin. It starts with a 30-day grace period where you may not even know there’s a problem. For example, if your checking account doesn’t auto pay your credit card balance, you might be oblivious to the delinquency. On the other hand, you may be painfully aware and scraping together a minimum payment to make ends meet. Either way, you have a month before anything happens.

On day 31 of your neglected loan, a penalty interest rate usually kicks in so that your new minimum balance is higher, and harder to achieve.

Next, your credit card company usually alerts the credit bureaus, making it harder to secure a loan (or even rent an apartment or get a job!) in the future.

Car Loan

Believe it or not, car financing companies want to keep your business. Depending on your specific circumstances, they might surprise you with options. It is in their best interest to keep you paying, even if that means offering grace. Do not expect any favors, but instead ask what they prefer you do so you’re not neglecting your loans altogether. Lenders may allow you to defer the payment for a few weeks or refinance for a lower payment.

If your lender receives no communication from you, however, late fees will accrue. While your lender has every right to start the repossession process early, they may wait until more than one payment has been missed to reclaim the vehicle.

Mortgage

Possibly the most serious loan to neglect is your home mortgage. Before falling behind, call to find out your options. The longer you wait to communicate, the less help your lender will be able to offer by way of loan modification, forbearance, or a more flexible repayment plan.

Penalties for neglecting to pay your mortgage include repayment requirements, late charges and legal costs. After missing 2 or 3 months of payments, your bank will move to foreclose, or repossess the home, starting with a Notice of Default filed at the local government’s records office. If you go into foreclosure and the home is worth less than when you moved in, the bank may also pursue you to collect that balance. As for your financial future, a foreclosure is arguably the most damaging matter to appear on your credit report, interrupting your ability to get a mortgage, job, or even small loan in the future.

Most of us can foresee a problem making payments long before the due date. Financial hardship usually gives you a few weeks before missing payments, and if that’s the case, phone your debtors immediately.

Image Source: Flickr

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