What Happens If You Cannot Pay Your Loan On Time?

Covid-19 affected everyone’s lives, mostly in a bad way. Businesses are closing. Livelihood is lost. Job opportunities are gone. You find yourself either on your way back to Philippines together with other OFWs who were repatriated or staying in the country – in the meantime – while waiting for deployment.

Since your employment overseas was postponed, you might be worried about a lot of things including the loans you have to pay.

That being said, what happens in case of delay in loan payments?

First, Let’s Define Loan Default

Every loan contract specifies loan details, including loan term and penalty clause. Loan default is when you are unable to pay your monthly loan payments for a certain period. This is different from loan delinquency wherein loan is unpaid for a long time.

Usually, lenders, particularly large banks, give up to 90 days grace period before they can tag a borrower in default. After 90 days and no payment is still given, your account will be classified as “in default.”

When this happens, the following situations follow:

Situation No. 1: Debt Will Pile Up

This is the most obvious effect of non-payment of loans. Your loan is continuous, which means interest will accrue. You also have to pay for penalty fees and other charges, which don’t come cheap. Some charge penalty fee for every day the loan remains unpaid.

This simply means the principal amount won’t decrease but the charges are continuously increasing. Your P5,000 loan could double or even triple and you won’t even notice.

Situation No. 2: Involvement Of Collection Agency

Lenders have dedicated department or group of people in charge of collection. They will send collection statements and demand payment of loans. Apparently, this will only last for a certain time. After a given period, unpaid accounts will be sent to collection agencies, who will now demand payment of loans. Oftentimes, these agencies are more aggressive compared to lenders.

Situation No. 3: Foreclosure Of Assets

One of the worse things that could happen to someone is seeing your hard-earned assets taken from you. Lenders don’t want this to happen, which is why foreclosure through public auction is the last resort.

Sadly, lenders will be forced to take your car or house if you are unable to pay your loan. Still, this is their way of recovering from their losses for lending money.

Don’t be complacent. You will still have to pay for the balance in case the cost of your property is not enough to cover the loan, including additional charges.

Situation No. 4: Poor Credit Score

Credit score is crucial, especially when you apply for a loan. This shows how financially responsible you are as a borrower. The lower your score, the higher the chances of getting your loan application rejected. Even if your loan application is approved, you will be given a higher interest rate.

There are many actions that will warrant a low credit score. This includes non-payment of loans.

Loan Default At The Time Of Pandemic

As of this writing, the Credit Information Corporation urged banks not to declare loan defaults during the pandemic (1). The Bangko Sentral ng Pilipinas also gave banks until March 2021 to reclassify their respective borrowers’ past due loans. This way, borrowers will have time to keep up with payments and prevent them from defaulting.

Still, don’t rely on this alone. If you have existing loans, then talk to your lender immediately. Discuss and negotiate what can be done so you can slowly pay for your debts and avoid being in default.

A debt is still a debt. Even if there is pandemic, you still have to be responsible for your loan. Pay it little by little instead of none at all.

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