When a lender gives you an unsecured loan, you don’t have to put up your car or home as collateral. This means the lender is trusting you to repay the loan. If for some reason you stop making payments, you won’t go to jail or have your home or car taken away, but you still could face serious consequences in terms of your ability to borrow money in the future. You also could find yourself having to answer to a debt collection agency.
If you can't repay your unsecured loan, you need to contact your lender immediately and try to negotiate a new payment plan. This is also true if the loan has been transferred to a debt collector.
Talk to Your Lender
If you miss one or more payments on your loan and don’t contact your lender to explain the situation, you can expect to be contacted by your lender by mail. At this stage, it’s important to communicate back and explain why you can’t make payments. You and your lender might be able to agree on a modified repayment plan that reduces your monthly payment. Don’t expect a lender to forgive your debt, no matter how serious your reasons are. Your best hope is for a reduction in payments, though that will extend the term of the loan. If the loan is a student loan, however, you may be able to obtain a deferment. This is a good time to get credit counseling from a reputable credit counseling organization.
When a Debt Collector Calls
If you continue to miss payments without contacting your lender, you can expect your debt to be turned over to a debt collection agency or a lawyer. This means that your lender no longer expects to recoup the money you were lent and you have defaulted on the loan. Debt collectors are known to be aggressive when it comes to loan repayments, but by federal law, they are not allowed to harass you or use deceptive practices. The Fair Debt Collection Practices Act prohibits debt collectors from contacting you at your place of employment or during unreasonable hours at your home, such as before 8 a.m. or after 9 p.m. To stop a debt collector from contacting you repeatedly, you must communicate with the collector at least once in an attempt to pay the debt or explain that you are being contacted in error, if that is the case.
Long-Term Effects of Default
If you ignore both your lender and any debt collectors who try to contact you and continue to miss payments on your loan, you could face a civil lawsuit that results in a lien being placed on your bank account or your paycheck, or in the garnishment of your tax refund. Your credit history will be impacted, which will make it harder to borrow money at lower interest rates for a few years into the future. It also could keep you from employment or housing since some employers and landlords consider credit history in their evaluations.
Catie Watson spent three decades in the corporate world before becoming a freelance writer. She has an English degree from UC Berkeley and specializes in topics related to personal finance, careers and business.