by Venus Zoleta, on category "Personal Loan"
July 11, 2018
Unexpected situations—like a job loss, medical emergency or death in the family, or calamity—can put even the most responsible borrowers in a tight spot, making it extremely hard to make loan payments on time.
Is your loan in danger of going into default? Defaulting on a loan comes with serious financial consequences. Not to mention that you’ll spend stressful days and sleepless nights thinking about how to get yourself out of the sticky situation.
You don’t want to reach that point—and you can keep it from happening. Understand how loan default can affect your finances.
Failure to make monthly loan payments for a certain period (as specified in the loan’s terms and conditions) results in loan default. Not to be confused with loan delinquency (which happens as soon as you miss a mortgage payment), a default is declared when your loan remains delinquent for a long time.
The time before a loan goes into default varies from one lender to another. Generally, borrowers in the Philippines have a maximum grace period of 90 days or three months to settle their outstanding balance before their loans become in default. That’s the case for Pag-IBIG multi-purpose loans and housing loans.
Some banks have shorter grace periods before declaring a loan default. Citibank, for instance, places a personal loan in default if it’s unpaid for at least 60 days.
When your personal loan defaults, you’ll owe more money because the lender will require you to fully and immediately repay the overdue balance, interest, penalties, and other charges. For each month that your loan is unpaid, you’ll have to pay a late payment fee of 7% to 10% of the unpaid balance or PHP 200 to PHP 600, whichever is higher.
Simply put, stopping your personal loan payments can quickly put you in deep debt.
Also, the lender will close not just the unpaid loan account but also your other existing loan or credit card accounts with the same institution. Worse, your unpaid loan account will go to a collection agency, adding more pressure for you to repay your loan.
Vehicle repossession and property foreclosure are the worst and most painful things that can happen to any borrower. These are the risks of defaulting on secured loans such as auto loans and housing loans.
Lenders have to recover their losses from unpaid loans, and so they can take back the loaned car or house when a borrower fails to repay the loan. For example, if you availed of an SSS housing loan, the SSS will foreclose the property as soon as you’ve failed to make six monthly loan payments.
Banks and other lenders will put the asset up for sale at a public auction. If the price at which the repossessed car or foreclosed home is sold isn’t enough to cover the unpaid loan, the borrower is still liable for the difference in amount.
If you default on your loan payments, your credit history suffers. Banks report unpaid loan accounts to the credit bureaus, which will compute your credit score. With a bad credit history, you’ll get a lower credit score that hurts your chance to get a loan or a credit card in the future. If you’re lucky to be approved for one, you might be given a high interest rate.
Failure to pay off your loan from the government can affect the benefits you’ll claim. For example, if you default on an SSS salary loan, SSS will deduct the loan balance, including the penalty and interest, from your retirement, disability, or death benefits.
For SSS voluntary members who are unable to pay their loan, the deduction applies to their sickness, partial disability, or maternity benefits.
For the specific consequences of stopping your loan payments, it’s best to ask the bank or government agency that issued it. You can also find the information in your loan’s terms and conditions. Just look for the section about loan default. When you’re on the verge of defaulting on your loan, you’ll find the fine print—what with its tiny and lengthy text—a worthy read.
Before worse comes to worst, contact your lender to explain your situation and negotiate for adjusting your monthly mortgage until you can return to fully repaying your loan again. If you have an SSS loan that has defaulted or is about to default, consider availing of the loan restructuring program to ease up your loan payments.