Consequences of Defaulting on a Signature Loan
A signature loan default is a unique type of unsecured loan default that will hurt your financial stability in the future. You will not lose any assets, as you did not place any assets down for collateral, however, your credit standing will be severely impacted.
You used your signature to assure the lender against default. This was essentially a personal promise you would pay on time; when you signed the contract, you agreed to penalties if you did not make good on that promise. These penalties will vary by contract, but some are universal.
Loan goes to Collections
Before your loan is officially in default, you will receive several notices of delinquency. These may come from the lender. Typically, after several attempts to collect from you directly, the lender will allow a collections agency to get involved.
Collections agencies receive a commission on money they secure, so the agency will typically be very aggressive. As soon as your payment is 30 days late, you will see your credit score go down. When the loan goes to collections, your credit rating will suffer further. Your loan contract sets forth exactly when a collections agency can be used; consult the contract if you feel the agency is involved inappropriately.
Borrower Receives Notice of Default
Your contract also states the terms of when your loan will be considered to be in default. Your lender will send written notice that you are in default, and you will have a certain amount of time to respond to this notice. If you have lost a job, suffered personal tragedy, or cannot pay for a specific reason, you may consider declaring loan hardship. Lenders may be willing to grant leniency while you deal with these issues. Otherwise, you need to take action immediately to prevent the default from hitting your credit report.
Lender takes Legal Action
A signature loan does not use collateral, but a lender still has the ability to legally seek payment from you in some means. If legal action is merited, you may find yourself in a lawsuit over an asset you purchased with the funds.
It is also possible for the lender to seek a judgment to garnish your wages. This is typically only possible with a senior lender, like a mortgage company or bank. If your signature loan came from a small, online, third-party lender, a judge will not be as likely to handle it through garnishing wages. You will still have to find a way to pay, however, and they payment may include high penalties.
Ultimately, if you cannot pay your loan, bankruptcy may be the only option. All other avenues to modify or settle the debt should be attempted first. However, if you truly qualify for bankruptcy, then it may be the only means to resolve the outstanding debt.
One, or a number, of your assets will be liquidated to pay for the loan. Signature loans are typically smaller than secured loans such as home mortgages or auto loans. For a large loan, though, a person with insufficient cash flow may need complete bankruptcy liquidation.