Understanding bank loan defaults and what happens if you default

What happens when you default (miss a payment or multiple payments) 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. A mortgage is a common example of a secured loan, whereby the loan is secured against the property.

Defaulting on a secured loan

This security allows the bank to take possession of the asset the loan is secured against (such as your home) if you fail to keep up with contractual repayments.

The loan agreement will detail the actions the bank can take to recover the money you owe, as well as the timescales involved before recovery action will take place.

Defaulting on an unsecured loan

Although the bank holds no security over an unsecured loan, failing to repay can still result in a different form of legal action being taken against you.

If the loan amount is significant, or you have other debts, this could ultimately lead to your sequestration or bankruptcy, so it’s important to know how to deal with the situation if you find yourself unable to pay an unsecured loan.

Open communication with your lender 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.

While each bank will have its own policy when it comes to dealing with defaults, 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.
• The bank could decide to hand over the collection of your debt to an outside debt collection agency. The debt collector may contact you by phone, email, letter, or even visit you in person at your home.
• The bank or debt collection agency may then apply for a County Court Judgment (CCJ) against you. Again, this would appear on your credit record for six years and have a serious impact on your ability to access credit in the future.
• If you continue to struggle, and fail to pay what you owe, they may be able to force you into sequestration (bankruptcy).

If you need to discuss your situation with a personal insolvency advisor, call one of our team at Scotland Debt Solutions. We help Scottish residents to free themselves of debt and look forward to a debt-free future.