Any form of personal or unsecured loan is commonly referred to as a private loan. According to Financial Times, it is a form of money borrowing from family members at cheaper or negligible interest rates.
Unfortunately, the opportunity to avail of private loans is unavailable for bad creditors. However, they can still seek money borrowing options from credit unions, local and small lenders, and online lenders.
There are also many forms of private loans such as short-term, payday, unsecured, etc. Besides these, borrowers can avail student and credit union private loans. Therefore, the consequences of defaulting on each form of loan would vary.
Borrowers that default between three to six times receive a formal default notice letter from lenders. The mail specifies loan details, broken terms, and next steps. Moreover, the default notice gets directly added to the credit report.
So, future lenders can view these notices and total defaults before providing a loan. Therefore, borrowers find it challenging to avail online and offline loans with hard credit checks. Besides this, credit unions stop providing private loan options to bad creditors.
Moreover, default notice is only the first practice. Besides this, lenders may delegate loan collection to an in-house or third-party collections department. The debt collectors or lenders can even send court appearance notices.
Recurring payments improve the credit score and open the door for better loans. On the other hand, defaulting on a private or any other loan tarnishes the borrower's ratings. Moreover, a borrower with an inability to repay existing debt would require to file bankruptcy.
Bankruptcy records last for at least six years. Also, during a hard credit check, lenders may stray away from borrowers with such a record in the report. However, declaring bankruptcy clears the existing debt.
Besides this, borrowers should consider opting for voluntary bankruptcy if the unsecured loan debt exceeds £20,000. Also, the minimal debt consideration before availing bankruptcy should amount to £5,000. Unfortunately, bankruptcy can also become an involuntary option.
Involuntary bankruptcy is a case wherein the borrower only has assets and no money. Therefore, the lender continues to demand repayment through court judgements and notices.
Another option would include avoiding bankruptcy by filing an Individual Voluntary Agreement (IVA). It helps the borrower to resume more affordable monthly repayments. Additionally, IVA doesn't leave a long-term remark on the credit report.
Another possible repercussion of defaulting or disagreement with a lender is CCJ. It means the borrower would receive a notice for appearing in court. After that, a hearing would commence for stating if there a viable case.
If the court agrees in favour of the lender, it will set a repayment plan for the borrower. In the case of personal secured loans, the borrower would require to make repayments by giving up on collaterals. Therefore, any asset such as a house or a car would become the lender's property.
If the borrower fails to clear the repayment in the next thirty days, the CCJ will become a part of the credit report. The remark remains on the report for the next six years. However, CCJ applies in Wales, Northern Island, and England. Meanwhile, Scotland courts have another process.
Defaulting on private or other loans can create serious employment consequences. According to a source, a student loan default can damage the credit report and deny employment with credible firms.
Job opportunities with government agencies involving financial advice and budget management, requiring security clearance, etc., would also become impossible to avail. Besides these, it would become more challenging for being promoted because it requires handling finances as a primary role.
However, borrowers can resolve defaults and debts through money lenders in the UK. Debt collection is another method of consolidating different loans and making a single monthly repayment. These would reduce or eliminate employment and promotion issues at a firm.
A CCJ court ruling can also cause two other critical possibilities for a borrower with a personal loan. Primarily, debt collectors would sue the borrower for debt, and if the latter misses the appointment, the judge can rule without a hearing.
Under such circumstances, the hearing favours the debt collectors or lenders. Therefore, the ruling could include garnishing the paycheck wages of the borrower. A secondary ramification could include a lien on the house. It means the debt collection can prevent the owner from reselling.
Besides this, a lien on the house also allows debt collectors to prevent the borrower from availing a credit line or home equity loan. Sometimes, the former can even force a house sale for receiving the repayment.
Borrowers have a few options to resolve defaults and avoid them from occurring. Primarily, they should inform the lender about the current financial conditions. Under such situations, lenders provide other solutions such as a change in repayment amount, scheduled holiday, etc.
Another solution for avoiding defaults is by seeking money from family and friends. Often there is no interest rate charged by such lenders, and the repayment tenure is flexible. Similarly, firms also offer programs for employees suffering from a financial crisis.
The employer's Human Resource (HR) department can often provide the required solutions for this problem. Additionally, it is necessary to seek counselling at no or reasonable government and private agencies.
Credit counselling agencies would help to guide through fund management. Additionally, they would also provide reasonable solutions depending on the credit report. There are also other default prevention measures such as debt consolidation, debt prioritization, and availing help from free national debt charities. National Debtline, Citizen Advice, and StepChange are three of the most prominent financial debt management charities in the UK.