Pointers on how to avoid loan defaults
Defaulting on a loan is bad for your credit.
05:59 09 December 2013
Default! It usually happens when your debts pile up and you have no way out. It leaves your reputation tarnished. Outside circumstances can prevent people from making payments. Prices and interest rates are rising faster than wages, with savings suffering under inflation. Conditions are not favorable if you are not well to do. Yet, there is a world of difference between missing a payment once and defaulting on a loan.
What is loan default?
Default occurs when someone fails to make a payment. Missing once or twice means a penalty. Continually defaulting results in the lender repossessing whatever property it paid for.
The principals of a loan
When taking out a loan consider three things:
- Your present income
- Your future outlook
- Emergencies
In other words, give yourself wiggle room and do not take a loan that you cannot pay if your circumstances change.
Keep Saving
Taking a loan and continuing to save may seem contradictory, but it is important. Keep savings in a separate account and do not dip into them unless absolutely necessary. If you have lump sum, pre pay your liability and ask the bank to restructure your monthly payments.
Talk to your lender
If you have been faithful in your payments and find yourself on the brink of default, a lender may be willing to adjust your agreement. It all depends on your relationship with your lender and how considerate he is.
Avoid Foreclosure
If it comes to it, selling (for example a property) is much better than dealing with the penalties of foreclosure.
Extend loan tenure
Also known as debt rescheduling, you may be able to negotiate smaller monthly payments over a longer period of time. This decreases the value of the loan but prevents default.
Switch Loan
If you’re dealing with a small amount of money, you may be able to switch to a different provider to improve interest rates. Just don’t get duped by attractive deals with hidden catches.