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 personal loan or any type of 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.
What Does It Mean If a Loan is in Default?
A loan is in default if a borrower fails to make monthly loan payments or pays less than the required amount for a certain period (as specified in the terms and conditions).
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.
Can You Go to Jail for Not Paying a Loan in the Philippines?
The Bill of Rights under Section 20 of Article III of the 1987 Charter states that "no person shall be imprisoned for debt." This means it's illegal for lenders and debt collectors to have you arrested or jailed for not being able to settle your debt, according to Atty. Aileen Amor - Bautista in her Ask Moneymax column about managing debt in the new normal.
However, she notes that when you issue a bouncing check or abandon your residence without informing your creditor, these actions can be used against you in a criminal case. So think twice before you decide to run away from your problem.
What are the Consequences of Loan Default?
Wondering what will happen if your loan is not paid? You can expect any of these loan default consequences when you have an unpaid bank loan in the Philippines.
1. Your Debt Will Pile Up
When you default on your personal loan, 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, this is what happens if your personal loan is not paid: you'll be buried in deeper debt.
Note: Under the law, a lender cannot collect interest from the delinquent or defaulting borrower if there's no contract. In the case of online loans, however, selecting "I agree" on the lender's Terms and Conditions on its website is considered a legally binding contract even if there's no written version of the document. Under Article 1356 of the New Civil Code of the Philippines, contracts are binding "in whatever form they may have been entered into."
2. Your Loan Accounts with the Lender Will be Closed
Another consequence of defaulting on a loan is that 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 debt collection agency, adding more pressure for you to repay your loan.
3. The Lender Will Take Back Your Car or Home
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.
4. Your Credit Score Will Drop
If you default on your loan payments, your credit history will suffer. 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.
5. Unpaid Government Loans Will Be Deducted From Your Benefits
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 those figuring out how to pay their SSS loan past due, you can apply for the SSS loan restructuring program to help you catch up on your loan payments.
Can Banks Declare Loan Default in the Philippines During COVID-19?
If there's one thing that can force you to a loan default, it's the COVID-19 pandemic. Fortunately, the Credit Information Corporation (CIC) is on the side of loan defaulters. The CIC urged banks and private lenders to not declare a loan default or delinquency during the pandemic.
According to then CIC President and CEO Jaime 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,” he said.
Garchitorena also said that the CIC is 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.
To find out more about loan default and its 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.
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-  Agreement on interest must be in writing (Acosta, The Manila Times, 2018)
-  Banks urged not to declare loan defaults during ECQ (PhilStar, 2020)