If you’ve defaulted on a loan, many fear that it can have long-lasting implications that may see them sentenced or given a hefty fine. This is with the loan provider looking to recover this money, which can cause a lot of anxiety.

While you won’t be imprisoned for not paying a loan, you can incur charges and be visited by a debt collection agency which is usually the last resort if they have tried to contact you or you haven’t contacted them to settle the dispute. Read on to find out about other repercussions and how you can manage your payments to ensure financial freedom.

You’ve Defaulted On A Payday Loan: What Happens Now?

What Happens If I Miss A Payment?

If you’re looking at this and have missed a payment, this usually won’t affect you too much. This is because most lenders can give you forbearance and allow up to 48 hours to 14 days before any late fees are added, which also includes reporting to a credit agency.

This period is important as lenders appreciate that people may get paid later than expected, or there may be a delay in a bank. However, there will be people who can only make the payment after this window, which is where the penalties come.

If You Miss Multiple Payments

To avoid being labelled as having aggressive collection practices, the lender will attempt to contact you through email, phone, text, or even a letter to request payment. Due to regulations, they can only contact you a certain amount of times per week or month.

This will give you some breathing space, but this can begin to spiral out of control as the lender can add a maximum £15 late fee for late repayments, so the longer your loan is and the more often you miss payments, the more likely this fee will be applied to your account.

Not only this, but you can incur daily interest charges, which are capped at 0.8% per day, so the later you make the payment, the more days’ worth of interest will be applied to your payments.

At the most extreme side of things, if the lender has contacted you to request a repayment plan with no response, they may look to get a county court judgement which will be passed onto a debt collection agency who aren’t as lenient when it comes to collecting the payment.

This can add more to your overall repayment as this may include their fees as well as court fees, so this is where any assets you own can be seized to recover the payment.

How Does This Affect A Credit Score?

If you have multiple loans in the process of repayment and you display a pattern of late payments, the lender can ask for a late payment marker to be added to your credit report, which can drop as much as 180 points and can stay on your record for 6 or 7 years.

If you’ve missed one payment, any creditors may see this as a minor indiscretion, so even though it will only severely affect your chances of getting credit in the future, it can be a red flag for lenders that you aren’t entirely reliable.

This is mainly for those with stricter eligibility criteria, so you may have to rely on same-day or preapproved loans that tend to have a higher interest rate. The more this becomes a problem, the harder it will be for you to bounce back and recover your position.

How To Get Out Payday Loan Debt?

While being in a position where you feel being in debt can seem endless, there are ways that you can get yourself in a better position where you might not be completely debt-free, but you’ll be in a much stronger place than you were when you started. Below are a few aspects you’ll want to consider that can help you get closer to financial freedom.

Debt Management

You should try to make an effort to contact your lender to discuss your situation and come to an agreement on some sort of repayment plan, even if this is slightly lower than what you were paying before. Consult with a debt management firm or charity. They may be able to arrange on your behalf a temporary repayment plan which can be referred to as a token payment plan which sees you paying £1 a month until your finances improve.

Filing For Bankruptcy

Filing For Bankruptcy

This path can be very destructive, even though this classification can stay on your record for 7-10 years. While it can clear any debt you have, it doesn’t include debts that have collateral or have been ordered by the court to be repaid.

Before considering this option, you should see if you apply for debt consolidation, which can have less of an impact on your score and combine all of your payments under one sum that has a more affordable interest rate.

Money Management

If you do need to take out a loan and you have one standing or your credit score is lacking, make sure you compare rates that are based on your circumstances, so even if you find a loan that might be quicker to pay off, this doesn’t mean you have to take shortcuts.

As well as this, you want to borrow only what you need and no more, which can seem hard to do, but if you’re precise, you can work out what it is you need instead of something you want, which can apply when you’re looking to acquire a credit card as well.

If you are still determining if you can make payments, take a look at your income, make deductions for essential payments, and see what you are left with. It would be helpful if you also looked at this total to set some aside for those emergency costs.

Building Back Credit

A good score is rated between 881 and 960, with anything above 720 being average, so you should aim to make all payments on time and reduce your credit utilization ratio below 30%. If you have credit cards, make sure you use these sporadically and check the credit limit to keep these low and build a consistent payment behaviour. Be sure to check any open financial contracts to see how these affect your score.

Doing things like setting up direct debits can make sure you build a solid payment history, but paying lump sums may not necessarily affect your score. Still, they can help you when interest fees are added, and there are some cases where you may be paying off purely interest.

Conclusion

As well as these, making sure that you have a curated budget every month during the beginning stages is really important, as spiralling costs on everyday goods and utilities may not be realized. Often, people end up paying more for these than they realize, so realizing this and comparing prices, loans, and deals can be very useful in allowing you to manage your day-to-day spending.

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