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Often, when the interest accumulates into a bigger amount or an unexpected expense came, a borrower may decide to default on the loan, and this can wreak havoc on your finances in the future.
Defaulting on a loan means being unable to repay the debt over a specific period of time. When it happens, it will be reported to the debt collection agency which, by the way, is responsible for contacting and collecting the loan to the borrower.
What Happens On A Loan Default
When a borrower has missed the payments consecutively over a course of months (or weeks depending on the loan agreement), it is considered a default. Often, lenders will offer a grace 15-day to 1 and a half month grace period before you are charged for a missed payment. This period, which is called delinquency, gives the borrower enough time to make up their missed payments or contact their loan provider to avoid default.
Many borrowers have already defaulted on a loan once in a while and it can cause a lot of problems, thus it should be avoided at all cost. Since it will be reported to the debt collection agency, it will also be recorded in your credit report, causing your credit score to decrease. It can also create a negative impact on your loan application since most lenders are more likely to decline borrowers with poor credit remark.
For borrowers who have borrowed a secured loan and defaulted on it, the consequence can be very severe. Since the loan is backed up by collateral, that collateral (which can be a house, car, or any property) will be repossessed by the loan provider. When this happens, the lender has the right to put the asset in the market and once sold, the money will be used to repay the loan.
That being said, it’s important to avoid defaulting on a loan. If you think that you can’t afford the repayments, then you should not borrow a credit or ask for a lower amount instead. Meanwhile, if something happened causing you to miss repayments, be sure to contact your lender in the soonest possible time.
Taking out a loan means borrowing a sum from a lender. You will then sign an agreement that states when you are expected to pay it off. In most cases, you will be required to make monthly payments over a certain period of time. How much you will need to pay will be determined by the loan rate that the lender will charge.
Understanding loan rates
You are charged interest by the lender when you borrow money. This means that you will not only need to repay the amount that you borrowed. You will need to pay the interest too. What’s good with this setup is that this will allow you to get access to cash upfront while also being able to spread the costs involved over a longer period of time.
Interest rate son personal loans tend to be lower compared to what is charged on credit cards. There are a number of things that can affect how much your loan rate is going to be. This could depend on the lender, what kind of credit history you have, and what is your credit score.
Taking Unsecured Loans
It is important to note that when you take out a personal loan, you are getting an unsecured debt. No collateral is needed by the lender to approve it. Approval hinges on whether your credit score meets their requirement and if you have the necessary income to pay back what you intend to borrow. The kind of credit history you have established can also affect how expensive or not your loan rate is going to be.
A good credit score means a lower interest rate most of the time. It also means your application will most likely get approved. When lenders look at your credit history and find that you have been responsible in managing your debts in the past, they would feel more confidence in lending you. This then could result in a more competitive loan rate, which translates to more affordable repayments.