Published: June 23, 2020 | Updated: August 26, 2020 | Posted by: Moneymax | Personal Loan
Are you close to a loan default? 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.
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. Don’t let a loan default affect your finances.
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A loan default results from failure to make monthly loan payments for a certain period as specified in the loan’s terms and conditions. This isn’t to be confused with loan delinquency, which happens as soon as you miss a mortgage payment. A loan 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 them. 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 some of the worst things that can happen to any borrower. These are the risks of defaulting on secured loans such as auto loans and housing loans.
As a way to recover their losses, lenders will take back the loaned car or house when you fail 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 of the repossessed property isn’t enough to cover the unpaid loan, you will still be liable for the difference in amount.
If you default on your loan payments, your credit history suffers. Banks report unpaid loan accounts to credit bureaus in charge of computing 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 higher interest rate.
Failure to pay off your loan from the government can affect the benefits you can 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.
If there’s one thing that can force you to a loan default, it’s the COVID-19 pandemic. Fortunately, the Credit Information Corporation is on the side of loan defaulters. Recently, the CIC urged banks and private lenders to not declare loan defaults during the pandemic.
According to CIC President and CEO Jaime Casto Jose Garchitorena, banks need to ensure consumer rights amid a national health crisis. “We are one with the national government in promoting and protecting the collective interest of our citizens during this unprecedented period,” Garchitorena said.
Garchitorena also said that the CIC are making sure financial institutions are submitting accurate data to ensure a fair review of every borrower’s credit history and financial condition during the pandemic. “The CIC system is not simply a negative or black list as it allows the lenders to decide how to tag unpaid loans and be in sync with the government’s issuance on the matter,” he added.
Bangko Sentral ng Pilipinas (BSP) has also given banks until December 2021 to reclassify past due loans in areas affected by COVID-19. This will give borrowers more time to prevent defaulting their loans.
To find out more about loan default consequences, ask the lender or the government agency you borrowed from. You can also look for the loan default section in your loan’s terms and conditions. When you’re on the verge of defaulting your loan, study your loan’s fine print and find solutions from there.
Before worse comes to worst, contact your lender to explain your situation and negotiate your loan term. 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.
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.