Ravi Chandran
Loan defaults can send you into a downward spiral so fast that you won’t know what hit you
by: Hitesh Khan/
Personal loans are a way to use tomorrow’s income today, and unlike other loan products like mortgage loans or education loans, the process involved to apply for best personal loans is relatively simple.
But you must note that the interest rates are much higher than, say, for a car loan. This is because personal loans are unsecured loans, which means that the personal loan is not backed by any asset. The loan amount and interest rate depend on different parameters such as your income, credit history, repayment capacity, and others.
As even the best personal loans come with high interest rates, continuous loans defaults will put you on a downward spiral.
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Personal loans are basically unsecured loans which typically from $1,000 – $100,000 with fixed or variable interest rates that can be used to make a large purchase or to consolidate debt. Borrowers can use personal loans for credit card debt consolidation, business expansions, home improvements, medical bills and other major life expenses. Once recent study showed that personal loans are now the fastest growing consumer debt.
The best personal loans typically have a set term of three to five years and generally charge a fixed interest rate.
One report showed that millennials are driving the growth of the personal loan market. The report added that this category of people are rapidly coming into their earnings and credit wheelhouse – and because it takes time to become creditworthy, a higher proportion of millennials end up taking personal loans.
Even the best personal loans can get you into trouble if you get into loan defaults. Loan defaults or loan delinquency is your failure to make loan repayments when they are due. Extended delinquency can result in loan defaults. It is the failure to repay the loan as per the terms agreed between you and credit institution.
With loan defaults, the interests owed on your personal loans snowballs, drastically reducing your credit score and impacting your ability to receive future credit for lives other needs like the best home loans. Besides your personal properties being seized for default, the lending agency will also send a debt collection agency after you. The debt collection agency will try to contact you to repay, and this may include them trying to reach you at your place of work, or at home in full view of all your neighbours.
So, the rule of the thumb is, if you think you are going to loan defaults, contact your lender to discuss restructuring your best personal loans.
It is better to contact you lender to restructure rather than face the dire consequences of defaulting on a loan, which includes:
- Employment difficulties,
- Having money from seized from your accounts,
- Legal proceedings, and
- No access to crucial loans.
If the debt collection agency is not able to collect the delinquent loan, sooner or later it will reach a lawyer’s desk, and a collection attorney may take you to court after issuing a final letter calling upon you to pay your debt. If the debt is deemed valid, the court can issue a judgment against you, ordering you to pay it — and legal fees. Once you go to court, your default becomes a matter of public record.
A court judgment may allow a creditor to put a lien on your property, which means that if you ever sell it you’ll be forced to cover over some or all of that debt. A lender or collector can also ask a judge for an execution order.
Fortunately, you lender can’t go to the police to recover the personal loan extended to you. Personal loan cases are treated as civil cases instead of criminal cases, so the police will take a hands-off approach. But be mindful that if the amount owed to all of your creditors (including credit cards and car loans) is at least $10,000, you can be made bankrupt in Singapore.
The problem however isn’t just being declared bankrupt. The Official Assignee can seize your belongings which in Singapore can include, property, tools of your trade, property held in trust for someone else, and even clothing and furniture.
In fact, if you even try to take vacation, you will need the OA’s permission or you can be fined up to $10,000 and/or jailed for up to 2 years.
If you think you are going into loan defaults, it is good to speak to a loan consultant if there are constrains with restricted funds in growing the business. Loan consultants have very wide network with financial institutions and are very often more mindful of the different financial instruments which are available in the market out there. They can guide the businesses to the product which is the best fit for them.
Mr Paul Ho, chief mortgage consultant at iCompareLoan, said: “Most importantly, remember that you need to borrow when you don’t need the money, because when you really need it, no one will probably lend you any.” He added, “the Covid-19 crisis is a very tough time for many businesses and those having to serve loans. Of course the Budget and the Stimulus Package is giving some money for struggling businesses, but we must all be innovative and seize any opportunity to survive.”
