In extreme cases, debt collection agencies can garnish wages (take money directly from your earnings) to pay back the outstanding debt. The consequences of default can vary in severity for unsecured debts like credit cards and student loans. Mortgages, auto loans and secured loans are the most popular forms of consumer debt backed by collateral. If you default on a loan secured with collateral, the bank may seize your pledged assets. How Loan Default Worksĭefaulting on a loan will cause a substantial drop in your credit score, potentially resulting in higher interest rates on future loans. ![]() It’s essential to avoid having loans in default as it can lead to the seizure of assets or wages and seriously damage your credit score. Often, lenders will work with you to create a payment plan that works for both parties. If you’ve missed one or more payments or your loan is currently in delinquency, contact your loan provider immediately. Typical grace period (before reported to credit bureaus)ĭefaulting on a loan of any type can result in severe consequences.
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