Understanding defaulted bank loans and what happens if you default

What happens when you default on a bank loan largely depends on whether the loan is secured or unsecured. Secured loans mean that you have provided security in the event of default, usually in the form of property or a vehicle.

This security allows the bank to take possession if you fail to keep up with repayments. The loan agreement will detail the specific procedures the bank can take, and the timescale allowed before they can act to recover the debt.

Unsecured loans

Although the bank holds no security over this type of loan, failing to repay will result in a different form of legal action being taken. If the loan amount is significant, or you have other debts, this could lead to your sequestration or bankruptcy, so it’s important to know how to deal with the situation.

Open communication is essential as soon as you know that a payment will be missed. You should contact the lender to explain why you’re unable to repay, and if you can, offer to pay a small amount towards the loan.

Being proactive demonstrates responsibility and commitment to repaying what you owe, and should give the lender confidence that you won’t simply ignore their demands for payment if your financial troubles continue.

What happens after the first missed payment?

The bank will chase any missed payments, initially in the form of a written reminder. You may also receive a warning about the additional interest and charges that will be applied if payment isn’t forthcoming within a specified timescale.

If you communicate quickly, they may be open to negotiating a revised payment plan that could see you through your immediate financial difficulties. A good point to remember is that the bank really doesn’t want to see you default on your loan, and could be more co-operative if you communicate well.

Even if the bank cannot offer a revised installment plan, they may be able to stop any additional charges and interest being applied. These extra fees can mount up to considerable sums, and be the tipping point for debtors, effectively sending them into bankruptcy.

When you can’t afford to pay in the long-term

Being unable to make repayments in the long term will lead to further action by the lender. It may be their policy to use a debt collection agency to recover unpaid monies after a certain period of time, in which case you’ll be dealing with the agency or a self-employed independent debt collector in the future.

So here’s an idea of what could happen from the time of your first default:

• The bank reports to the credit reference agencies that you have missed a payment – this may have an adverse effect the next time you try to borrow, as it remains on your credit file for six years.
• They decide to hand over collection of your debt to an agency. The debt collector may contact you by phone, email, letter, or in person at your home.
• The bank or debt collection agency applies for a County Court Judgement (CCJ) against you. Again, this would appear on your credit record for six years.
• If you continue to struggle financially, and owe money to other creditors, they may be able to force you into sequestration at some point.

If you need to discuss your situation with a professional insolvency expert, call one of the team at Scotland Debt Solutions. We help Scottish residents to free themselves of debt, and can arrange an initial appointment free-of-charge.