Defaulting is the inability or failure to pay the interest or principle on an existing loan when due. A personal loan when someone dies cannot be defaulted and is either paid through the deceased person’s estate or passed down to dependents in unique cases. In the United States, being late on a loan repayment, defaulting, or missing a payment, can knock as much as 100 points off your credit score. This drop and its effects may persist in your credit report for up to 7 years depending on the terms of your loan. But before going in deep in any more considerations, you should first check if you could afford a loan first.
When borrowers take out a loan, lenders rely largely on trust to make the relationship work. Besides the general information you provide, banks and other lenders with, they don’t know much about you or your financial habits. They lend money hoping borrowers will keep their word and pay it back when it’s due. But if you fail to repay, banks have many tools at their disposal to reclaim their money back from you. so, what really happens to a personal loan when someone dies? Below is a deep dive into the consequences associated with late loan repayments, defaulting or missing a payment.
What Happens if You’re Late on a Loan Payment
When evaluating a borrower’s credit worthiness, banks and lenders consider payment history before approving you for credit. A long history of timely payments shows that you are a low risk borrower and a suitable candidate for a loan, while a record of poor repayment can affect your ability to secure loans in the future. Below is a closer look at what can happen if you’re late on a loan payment.
- You May Pay Higher Interest Rates: Late loan repayments may result in higher interest rates, often caused by creditors subjecting your interest rate to a penalty APR. For credit card holders in the United States, for example, the penalty APR is sometimes as high as 29.99%, which means that once it’s triggered you’ll pay significantly more interest on your balance.
- It May Show Up On Your Credit Report: Borrowers don’t usually have to worry about a late repayment showing up in their credit report if it’s only a few days late. A late repayment will only show up in your credit report if your payment is more than 30 days overdue. According to the gold standards for reporting late payments, the three main credit bureaus in the United States have to be notified when a borrower fails to make loan repayments 30 days from the due date. That said, borrowers can take measures to reduce the damage associated with being reported to the credit bureaus for late payment — just one delayed payment is enough to drastically reduce a good credit score rating. For example, a thirty-day delay is bad but not as bad as a 60 or 90-day delay. The sooner you catch up the faster your credit score can start improving.
- You May Incur a Late Fee: Failing to make loan payments by the due date can attract late fee charges to your existing loan. Late fees vary by lender and depend on the type of loan, your outstanding balance, and how late the payment is. Credit card holders in the United States, for example, pay a late fee of $25-$35 if their bill payment is a single day late from the due date.
A Personal Loan When Someone Dies Does Not Simply Go Away
A deceased person’s estate is generally used by an administrator to settle any unpaid debts he/she might have left behind. However, no one is legally obligated to repay a personal loan when someone dies, but this rule has a couple of exceptions:
- If a dependent had co-signed on a loan with the deceased, the debt is automatically transferred to the co-signer.
- Similarly, if the deceased had a joint account on a credit card, the surviving account holder now owes the debt.
- State laws can also require a surviving spouse to pay the debts acquired by the deceased during their marriage.
Defaulting or Not Paying Back a Loan in the United States
Defaulting on a loan is expensive, does serious damage to your credit score, and takes time to recover from. A personal loan is considered to be in default if the borrower has missed several repayments dates over a specified period in the loan agreement.
Besides pointing out that you’re not credit worthy, defaulting on a loan also has the following consequences:
- You Face Aggressive Third Party Collection Agents: Banks eventually stop chasing defaulted loans and turn them over to a loan collection agency. While your lender was probably subtle in their approach — making calls and sending request letters for payment — collection agencies are more aggressive when pursuing payment from borrowers.
- Collateral Can Be Repossessed: When a borrower’s loan is backed by collateral — like a personal loan taken on their car — lenders can eventually seize the car as a repayment for the defaulted loan. Based on the loan agreement with your bank and applicable state laws, the time frame for a collateral repossession varies.
- Banks Can Access Your Money: When you owe your bank money and don’t pay back, they can seize any money you have in a checking or savings account. This is referred to as the lender’s right to set off because the bank uses your money to offset your defaulted loan.
A personal loan when someone dies cannot be simply written off and there are laid out procedures which lenders and borrowers must follow when such scenarios occur.
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