If you are pressurized because of the excessive debt burden on your shoulders and looking for options which can help you to eliminate or reduce the debt, then it is a wise decision to opt for debt consolidation loan. Of course, there are other types of loan available that can help you to get back to track once again, but debt consolidation loan is the best option due to a number of reasons. Moreover, it is quite easy to get a debt consolidation loan for covering up the other loans which you have already taken from the market. But the major thing that you need to take care of is that you do not default the consolidation loan. For that, it is essential to plan beforehand.
What are the consequences of defaulting consolidation loans?
The consequences of defaulting consolidation loan actually depend on the kind of loan you have taken as well as the agreement which you have signed while taking the amount. Of course, there is no doubt that it will hamper your credit score and you will have to undergo various collections procedures. But everything depends on how long you actually stay in the default category. The consequences usually depend on factors like whether your loan is secured or unsecured, special agreements while taking a loan, etc.
Unsecured loans and secured loans
When it comes to unsecured consolidation loan, then it is necessary to understand that the lenders can go to a great extent to recover the amount because they don’t have any collateral security to recover the paid loan amount. In case of unsecured debt, you do not have to keep anything as security for taking the loan, and it includes credit card loans, medical bills, student loans, etc.
Unsecured loans demand monthly payment, and it will be clearly stated in the agreement. If you default on unsecured loans, then it is possible that you will have to pay huge late fees along with increased rate of interest on the balance loan amount. Substantial late fine along with increased rate of interest on the balance loan amount will definitely hike your monthly payment. If you continuously fail to pay for 90 days, then your account will be declared default and handover to the collections agency.
Between 4 to 6 months if you do not contact your lender for negotiating a new repayment plan, then you will start receiving calls and letters from the collections agency for paying the loan.
So it is always better that even before you reach this stage, contact your lender and ensure that you get a grace period for making the remaining payment. If you talk with your lender, then it is possible that he may waive the late fees and come to negotiating terms, which can actually save you from the hassle of the court proceedings. If your loan account is passed on to the collections lawyer, then it will be too late to make any sort of negotiation. If you are called for court proceedings due to nonpayment, then you will have to bear the attorney fees as well as other court charges. Moreover, court proceedings will be publicly recorded, and it will directly hamper your image as well as your job security. If you fail to pay your debt amount, the court may even order for garnishment of the monthly wages, which mean you will have to pay around 25% of the paycheck which you receive every month.
And going through the court proceedings also implies that it will really damage your credit history and credit score. Thus, it will become impossible for you to get a loan in future. It is always advisable that even before you reach is this stage, go ahead and make terms with your lender.
Now, in case of secured loans where you have mortgage your property, credit card line or any other tangible asset as collateral, the lender may not make much effort to recover the amount separately. If you cannot pay the loan, then he can directly sell the collateral and recover the amount. Home equity loan and auto title loan are considered as secured loans. If you have taken a home equity loan by putting up your house as collateral, then it is quite possible that after you go default, the lender can actually foreclose your property after four months. Again, the auto title loan is also based on the similar concept.
How can you avoid defaulting consolidation loan?
The primary factor that you need to keep your mind if you want to avoid defaulting a consolidation loan is to understand the details of the agreement that you are going to sign for taking the loan amount, irrespective of the factor whether you have taken a home equity loan, standard consolidation loan or some other kind of loan. You need to thoroughly understand the interest rate, loan fees, payment requirements as well as the other monthly charges you have to pay before taking this amount.
If you are not actually sure how much you can afford per month for repayment, then it’s better that you don’t take the loan. You need to be highly aware of the terms of the loan while signing the agreement. This will help you to understand how long you will require for making the payment and complete the loan.
Increase your monthly income
You have to make some extra money every month to ensure that you pay the consolidation loan amount every month without defaulting. The more you can save every month; the little are the chances of defaulting. There are several opportunities for doubling your income. You need to cut back on your leisure expenses and stick to only the daily basic necessities. The faster you can pay, the more you can save on the interest rates. And paying before the due date will also help you to enjoy a good credit score
Prepare a budget plan
If you have already taken a consolidation loan to reduce or eliminate market debt, then there are a lot of factors that you need to consider. Of course, you are trying your best to ensure that you don’t go default while paying the consolidation loan because it can actually lead to a significant problem. Creating a budget and will help you to understand how much you can save every month as well as the amount you can use for repayment. Analyzing your expenses as well as the debt amount can enable you to prepare a successful budget plan.
To know more about debt consolidation loan, you can check out the blogs written by experienced authors.