What is Loan Default and How to Deal With it

A huge income does not mean you are already qualified for a loan. It is also critical to bear a good credit score. However, many people need to know how they get poor credit scores despite high income. But, one of the main reasons is by having a loan default.

Loan default is an act of not paying or stopping payment of your loan. It can be from your personal loan or credit card, federal student loans, secured loans, or government loans. Failure to pay such loans can significantly affect your character, especially when applying for a housing loan.

So, if you have plans of owning a house and lot in the Philippines, know these common mistakes to avoid loan default consequences.

Loan Default Consequences

This recent health crisis caused many Filipinos to be unable to pay their debts due to job loss, medical emergencies, closed businesses, and unavoidable natural calamities. That is why financial institutions like banks and lending agencies declared no loan defaults during the COVID-19 pandemic, as advised by the Credit Information Corporation (CIC). Borrowers should be given more time to pay their debts, according to CIC and Bangko Sentral ng Pilipinas.

However, you should still pay your loans. Otherwise, you will likely suffer the following consequences.

Your debts will pile up.

Whenever you stop paying off your loans, the interest, penalties, and other charges also add up from your loaned amount. Therefore, it continues to increase over time, especially if you signed a contract from the lender.

Your account will be turned over to collection agencies.

Once you have a loan default, your account will be closed and will be turned over to the debt collection agency. It can be more stressful because debt collectors will continue contacting you until you repay your loan. What is worse, they will come and visit your home to check on you personally.

Any valuable assets you have will be taken away from you.

This is especially true if you have unpaid bank personal loans. Even if you have acquired an affordable house and lot, lenders can take that away from you to cover your outstanding loans. Hence, you will lose investment due to not paying off your loan.

You will obtain a poor credit report.

Poor credit standing will affect future loan applications, such as housing loans. Most financial institutions look into your credit score from the credit bureaus first to evaluate your financial capability. This means you are not qualified to avail of financial assistance even from the government. 

Your government benefits will be reduced.

Your benefits will be reduced if you have unpaid loans from the government and other agencies like SSS, PAGIBIG, and GSIS, including a student loan. All your unpaid loans will be deducted from your benefits, such as retirement or pension benefits. Thus, you will only receive a small chump of money upon retirement, which you cannot enjoy during your twilight years.

Also, you will not be entitled to tax refunds until your loan is fully paid.

How to Deal with Loan Defaults

Loan defaults can happen to anyone, even business owners. Although no one gets imprisoned with unpaid loans, the consequences are enough to stress you out and get you anxious. Moreover, people around you, especially your family, will also be affected. So, if you have unpaid loans, here are some tips on dealing with loan defaults.

• Reach out and be proactive.

 It is highly recommended to communicate with your lenders. Tell them your reasons why you were unable to pay off your loan. Then, ask for other payment options or workout programs to pay off your debts. 

• Consider debt refinancing.

If you’re a business owner, you may consider debt refinancing. You must take out another loan to fully pay your unpaid debt. But make sure this loan has better terms and lower interest rates. Ensure you have paid the entire outstanding loan; avoid paying a portion because you will end up paying more interest.

3 Tips to Avoid Defaulting a Loan

Loans are designed to help you in case of emergency needs. It’s financial assistance associated with interests and charges for a specific loan payment term. So, if you have plans to buy an affordable house and lot for sale, avoid defaulting on a loan by following these tips.

Evaluate your financial capability.

Determine your character as a borrower. How much are your earnings and liabilities? Is your job permanent and sustainable? Before taking out a loan, always plan ahead whether you have sufficient resources to pay your debts, even if you lost your job or have emergencies. Therefore, you must have other options or contingency plans in case of an emergency situation.

Identify your needs and wants.

One of the most common mistakes of a borrower is that they don’t know how to separate their needs and wants. If you don’t want to hurt your credit score, you must learn to know your priorities. Thus, ask yourself why you need to apply for a loan or if it is necessary to get a loan. Look for other means with no interest and a binding loan agreement if it is your wants. 

Avoid revolving personal loan accounts.

One most popular practices of many borrowers are taking out loans to pay other loans. Once renewed, they again pay the loaned amount to another loan. You might think you have solved your loan payments, but the hidden scenario is always the worse. You are only doubling the interest on the loans you took, even if these are separate accounts. The time will come you will fail to pay one of those loans and, as a result, fail to pay all your acquired loans. It’s a domino effect. So, avoid revolving accounts, especially unsecured debt. 

Keep your Financial Status Healthy to Secure an Investment

Taking out loans is tempting, especially now that Holiday Season is right around your corner. You need funds to buy gifts, food, and clothes for you and your family. However, you need to figure out if this loan can bear a positive or negative impact on your financial status. So, if you are preparing to secure an investment, such as buying your dream home, keep your financial status healthy and avoid loan default.

Lumina Homes offer attractive housing packages for borrowers with good credit history. We offer flexible payment options that fit your financial capability. Lastly, Lumina Homes are designed and developed with quality and sustainability in mind. Thereby, it is an ideal community for Filipino families, OFWs, and retirees.

Do you have questions about our house and lot package inclusions? Tap the message button below for queries and more details.