When you don't pay off a loan owed to a financial institution like a bank, the loan enters a state known as default. A defaulted loan has serious consequences for your credit score and financial outlook. A bank has several unpleasant options to force you to repay a defaulted loan. These can include taking you to court and seizing real property.
Goodbye Credit Score
A loan default severely damages your credit score making it all but impossible to secure new loans or other lines of credit without paying high interest rates and borrower's fees -- if you are approved at all. This information remains on your credit report for at least 10 years, in some cases, and may be renewed if the debt changes hands with a collection agency buying out the loan from your bank. This means the bad debt could literally affect you for the rest of your life.
Loss of Property
If the defaulted loan was tied to any piece of property such as your car or home, the bank has the power to seize it. Once a property is taken, you have no way of getting it back, as the bank will sell it to repay the defaulted portion of your loan. This doesn't mean you're off the hook for repaying the loan simply because the bank moved to seize your property. You may still be forced to repay any portion of the loan not recouped by the bank through auction of the property.
Court Action
A bank may choose to take you to civil court if it feels you have the financial capability to repay the loan but are simply refusing to do so. An unfavorable court decision can lead to your wages being garnished and bank accounts being monitored to repay the debt. This can lead to a very spartan lifestyle, as any large amounts of money will be seized by your debtor. While the debtor cannot garnish you below the poverty line, the debtor can keep you pretty close to it.
Federal Aid and Grants
If you are a student who defaults on a private or federally held student loan, you will be ruled ineligible for other forms of government aid including grants. Your college may refuse to release your transcripts while your loan is in default, which can make it difficult to secure new employment and enroll at a new school. A bank or other lending institution holding the loan may have the power to seize your federal tax returns to repay your defaulted debt.
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