Defaulting on payments is a tough financial situation to be in. But the reality of life is that it can happen to anyone including you. If you find yourself in this situation, what do you do?
Defaulting on payments is not as easy as it sounds. If you look at it, it could simply be the case of not having the money yet to pay for your financial obligations on or before the due date. If you brush this off and convince yourself to just hold off on payment until you have the money then you might be in for a surprise.
The way most lenders work is that they have fees and penalties in place in case you do not meet your payment obligation. They add these to your monthly payments on top of your principal and interest payments. If you miss the next month, your total payment gets bigger because they add last month’s penalties and fees to your total payment and you then get assessed for the current month’s penalties and fees.
Imagine going through the same process for a few months, your payment would balloon up to a huge amount. This is the main reason why you need to avoid defaulting on payments. Especially for the ones that carry huge interest, fees, and penalties. You will soon realize that you are now deeper in the red than you were originally the first time you missed your payment.
On top of this, secured loans carry an even bigger problem when you default on your payments. Your lender can choose to exercise their right to the collateral. This means if you missed multiple payments on a car loan, your lender can repossess your car. If it is a mortgage loan, you stand to lose your house. With student loans, wage garnishment could happen.
What is the difference between Delinquent vs Default
Before we go and look at ways to help you manage your payments, it helps to know the difference between being delinquent versus being in default. Normally, when you miss a payment due date, you are already delinquent. Depending on your lender, missing too many months of payments could mean you are already in default.
If you are in trouble of defaulting on payments, here are a few things you can look into to help you manage your situation.
Check your household budget
It is always a good idea to first look at your household budget. There could be times that you do not even realize you are missing a payment for the past few months already. An honest mistake but a mistake nevertheless. This is one of the reasons why you always need a comprehensive household budget. You need to list down all your income and expenses including all your payments.
More than reminding you what your payment schedule is, your budget should be the primary financial tool letting you know if you can afford purchases or not. In fact, it can even help you stay away from defaulting on payments if you knew you cannot afford to take out a new loan. You get to stay on track with your current payments allowing you to meet all your financial obligations.
Choose to make minimum payments
If you are in danger of entering default on your payments, check if you can make minimum payments. You can do this not only for the payment in danger of getting into default but even with other payments as well. This might help you in case the reason for missing payments is that your income is not enough to cover your expenses.
If you are making extra payments on some of your debt accounts, you might need to revert back to minimum payments first. This could potentially allow you to reallocate that amount over to minimum payment on accounts about to go to default. The goal is simple, aim to pay back at least the minimum on your accounts to stay current. But keep in mind that minimum payment is a short-term solution as expressed by CNBC. It is not meant for the long haul.
Talk to your lender
Defaulting on payments is a tough situation to be in and when you feel like you are already headed in that direction, one of the best things you can do is reach out to your lender. In fact, this needs to be high up on your priority list. Do not be afraid to dial in and talk to your lender if you know you are heading into some financial troubles.
Keep in mind that most lenders are willing to work with consumers because they want to still be able to collect your payments. They could work out a repayment plan where you could be given some flexibility in payments. It can be lower payments over a new repayment schedule or even giving you a few months of payment holiday.
One thing you have to remember though is that not all lenders are alike. Some of them might really have a system in place to help their customers. Other lenders might not have the flexibility to help you make the payments easier when you are going through a difficult time. But you will never know how your lenders will answer if you do not ask.
Tips to avoid the same thing from happening again
When you default on your payment, it comes with a number of problems for your finances. For one thing, it gets reported and reflected in your credit report. It can lead to a lower score making it more difficult for you to obtain credit in the future. It could also lead to higher interest rates if you do get approved for loans.
To help you increase the chances of steering clear in defaulting on your accounts, there are a few things you can do to get ahead of the potential problem. Here are some of them worth looking into.
Do not borrow more than what you can afford
Debt is not always a bad thing. In fact, there are instances when it can actually help you reach your long-term goals. But one thing you have to keep an eye out for is borrowing more than what you can pay for. Even before taking out a loan, putting a charge on your card, or simply borrowing money, make sure you have the ability to pay it back.
You might have a steady income and think this is enough for the monthly payments. But remember that this is not all where your money goes every month. You have basic needs such as food, shelter, and even clothing you have to spend on. Make sure your income can cover whatever payments you put in your monthly budget.
Small minimum payments add up over time
One culprit is adding seemingly small and insignificant amounts to your credit card bill every month. You might think that it would not make a lot of difference. However, doing the same thing over and over again for a few months can surprise you. Remember that those small monthly payments add up over time. Control your spending and focus on your needs more than your wants.
Check your budget before making a purchase
It makes a lot of financial sense to always check your budget before making a purchase. Big or small, every expense item will add up. In order to find the balance between needs and wants, understand how much you can spend and what you purchase you can use your money for. This way, you are guided by your budget letting you know if you can afford what you are about to buy.
Defaulting on payments is a hard place to be in but there are things you can do to help prevent this from happening. It is important that you get to manage your payments to help you reach your long-term goals.