We have to admit, loans have helped us get some things we may never have afforded otherwise. Loans have funded college educations, allowed low-cost home buying and made dream cars affordable.
Loans allow you to borrow money which you will then pay back with interest. And since you will be paying more than what was borrowed, it is always wise to never over-borrow. You also need to look at the repayment terms and rates. Will your financial situation be able to handle the monthly payments?
Over-borrowing and high-interest rates can potentially get out of hand. Remember that when you borrow more money than what you actually need, you will have to pay for that same amount of money plus its interest. Loans not requiring any income, credit and employment proofs usually have very high-interest rates. An example of which is a subprime loan. When the paying becomes difficult and you skip too many due dates, you’re just inches away from a disaster!
How Damaging Can a Loan Default be?
An extended loan delinquency results to a loan default. It is the failure to make payments that have long been overdue. To be able to get the borrowed money back, a lender may take legal actions.
A default will definitely show on your credit report. It can leave a scar so damaging you’ll suffer many possible serious consequences.
You may have to face collections. Some lenders charge you with a default fee in addition to the balance. This, together with your remaining debt, can also be charged with interest. Another consequence is a loan denial. Lenders will be skeptical about your ability to repay another loan. And if by any chance you get approved, they may charge a high-interest rate or ask for a large down payment.
Students who default their loans aren’t exempted. When you default on a student loan, it may become hard to find employment. You may no longer be eligible for federal financial aides. Many believe that their debts can be forgiven. What they fail to realize is, only a few are eligible for student loan forgiveness.
Default Prevention Tips
You do not want to default a loan and we are pretty sure you now know why. So, here! We’ve list down foolproof ways to make sure you avoid ending in a default.
Do not borrow more than what you need.
After a lender evaluates your loan application, you may be surprised to find out that you are eligible to borrow a bigger sum. Learning about such a good offer, you take the bait. What you failed to realize is that a bigger amount borrowed equals a bigger amount to repay.
When you’re in that situation, it is best to assess whether you really need that big amount of a loan or not.
Learn about the interest rates.
Many a borrower make the same mistake of getting a loan with a very low initial interest thinking they can save more. What they do not see is the balloon payment towards the end of the loan. When that time comes, it becomes harder for them to pay larger sums of money to completely pay the loan off.
It is better to choose a loan with rates that aren’t as bottom low but still very well within the range you can afford. This way, there isn’t so much adjusting need to fluctuating rates
Refinancing to reduce interest or shorten the loan term.
Whichever of the two works better for you, refinancing will help you afford the loan. Refinance programs allow borrowers to reduce their interest. This way, monthly payments are more manageable which lessens the chances of missing a payment.
Refinancing to change the loan term is also possible. By choosing a shorter term, you will reap the rewards of a loan paid off early. Lengthening the term so as to lower the monthly payables is also a good option. What you do with the loan term highly depends on what you are aiming for. The ultimate goal is to be able to pay off the loan.
Veterans have two very good refinance options under the VA program. The IRRRL and the Cash-out Refinance. These options have features to either reduce the interest, adjust the term, slide from an Adjustable-Rate Mortgage to a Fixed-Rate Mortgage, or a combination of these. Sustainable and affordable Homeownership for vets is what VA is after.
Look for income-driven repayment options.
This is particularly common with student loans, especially federal-backed ones. An income-based repayment plan allows a “fair enough” percentage for the income to go towards payment without wrecking the borrower’s bank.
The downside to this is the need to reapply every year. Although this can be laborsome, you’d still want to put in an extra effort to lower your payments.
Have one payment advance.
What this means is for you to be at least one payment due ahead of schedule. Making advanced payments when you have a few extra cash to spare will make such a big difference. If your loan has a prepayment penalty feature, you need not actually pay to the lender. Set this money aside, never touch it unless you really have a good reason to. This becomes your cushion if in case you feel like making a payment becomes difficult.
If you aren’t in default yet but feel like you are about to or if you’ve just recently defaulted, do not fear to give your lender a call. They will help you find better payment solutions.
Recovering from a default won’t be an easy feat. That’s why you have to take countermeasures to avoid getting there. Remember the tips mentioned above, and stay out of loan default!