Defaulting on a loan is never a good choice, although sometimes it's beyond a person's financial control. Defaulting on a loan can sometimes lead to losing your house or car. Lenders can also go after your paycheck. Do everything you can to avoid defaulting on a loan, including dipping into your savings account.
Unsecured Loans
Unsecured loans are not secured by collateral, such as a house or car. Personal loans are a common type of unsecured loans. You typically will not lose anything with an unsecured loan, since you didn't put up any collateral in the first place. However, if you owe a substantial amount, the lender may elect to sue you. If it wins the trial, the lender then has options to get the money from you, such as wage garnishment. If you're unsure of whether or not your loan is unsecured, see whether your loan is tied to anything. If the loan is not tied to any asset, it's unsecured.
Secured Loans
Secured loans are tied to something, such as a house or a car. A mortgage, car loan and home equity loan are prime examples of secured loans. If you default on a secured loan, you stand to lose whatever is tied to it. That doesn't mean you will, however. According to Go Banking Rates, lenders typically go after the collateral 90 days after you stopped making your last payment. If you know that it's been 90 days since your last payment, contact the lender and attempt to find some middle ground. If you can pay the past due money, you may not lose your assets.
Wage Garnishment
Wage garnishment is not limited to unsecured loans. If the lender does not receive and cannot recoup the money from your defaulted loan, it reserves the right to garnish your wages. If the court rules in favor of the lender and approves the wage garnishment, a percentage of your paycheck is withheld and given to the lender until the loan is paid off. According to Balance Pro, most states allow for up to 25 percent of a person's wages to be garnished. The law is slightly different for student loans. According to the United States Department of Education, lenders can only garnish 15 percent of a person's wages to collect money on a defaulted student loan.
Credit Score
Your credit score will nosedive if you default on a loan. Because payment history is taken into account to calculate your credit score, defaulting on a loan can wreak havoc on your credit. However, since there are a lot of other determining factors that make up your credit score, it's not possible to calculate how much your credit score will suffer from a defaulted loan. The defaulted loan will remain on your score for seven years.
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