Defaulting on loan repayments is every borrower’s worst nightmare. When most people go to take out a loan, they have a set goal in mind of making all of the repayments on time and paying the loan back in full as quickly as possible. However, life can sometimes get in the way of even the most sensible plans, leading to unexpected financial difficulty and, unfortunately, debt.
When faced with the prospect of defaulting on any credit product, it can be difficult to know where to turn. It may feel as if there are no solutions and bankruptcy is the only way that the problem will come to an end. However, defaulting is something that can stay with you for many years, so avoiding this at all costs will be the priority.
Your first step should be to speak to the lender and your bank to discuss the problem in as honest and straightforward a manner as possible. They may be able to offer a new payment plan that better fits your current financial circumstances- they don’t want you to default on your loan either, so it’s in everyone’s best interest for the loan to be paid off.
Speaking to a debt adviser or charity can also be a helpful way of getting the problem out in the open, and exploring various solutions and options for finding your way out of defaulting.
Although it may seem counterintuitive, there are situations where borrowing more can actually help you to avoid defaulting on your loan or credit card. Although other alternatives should be explored first, if there doesn’t seem to be a solution except defaulting, borrowing more could prevent things from getting to that point.
Transfer The Balance
If you’re struggling to meet credit card repayments and are heading toward defaulting, taking out another credit card might seem like the worst possible solution. Believe it or not, there are ways that a new credit card could help solve your debt problem. This solution only really works if your current debts are on credit cards or store cards, so research carefully before you commit to taking out any new credit card in case it will lead to more problems.
Balance transfer credit cards allow you to shift your current store or credit card debts onto a new card. The card then repays the existing debts, leaving you with the new card payments to deal with. The key to successfully using balance transfer credit cards is to find a card with the best possible rate, saving you money overall on your repayments and avoiding the high interest rates that may have been pushing you toward defaulting on the previous card.
A 0% credit card is ideal for balance transfers- these cards have no interest rate for a set time period, giving you the chance to pay off your previous debt without facing new interest payments. The 0% period won’t last forever, so it’s important to pay off as much as you can of the balance transfer card and avoid using the card and incurring additional debt. If you wait to make repayments and the 0% period ends, you could face much higher interest rates and end up in the same difficult position that you started out in.
Before committing to a new credit card, plan your budget carefully to ensure that you’ll be able to meet at least the minimum repayments each month- if you miss a payment then you could end up losing the 0% deal.
Consolidate Your Debt
Debt consolidation loans work in a similar way to a balance transfer credit card, but these loans are best suited to those who are close to defaulting on a bank loan or other high interest bills that can’t be paid off with your own savings. Put simply, a debt consolidation loan is a loan that’s borrowed with the aim of paying off all of your existing debts, leaving you with one monthly repayment to make.
Ideally, a good debt consolidation loan should have a low interest rate, allowing you to save money on the cost of your repayments. Many loans are also available with flexible repayment plans, so you should be able to pick the amount of time you need to pay it back in full, depending on how much you can afford to repay each month. The longer the length of the loan, the more interest you’ll pay overall, but ensure that the amount of the monthly repayments is manageable enough that you won’t be faced with the prospect of defaulting again.
Aside from allowing you to pay off your existing debts and avoid defaulting, debt consolidation loans can also simplify your budget down to one repayment, which can do wonders for your stress levels and make organising your finances far more simple.
If you’re currently facing the prospect of default but know that your finances will improve in the near future, you could consider a short term emergency loan. These types of loan, most commonly offered by payday lenders, offer customers a high interest, short-term loan that usually will need to be repaid within 30 days. Some lenders offer more flexible repayment terms, but almost all will be relatively short-term.
This type of loan should only be considered if you have no other way of avoiding default and the lender has refused to negotiate a change in your payment plan, leaving you with no option but to settle the debt as quickly as possible. If you know that you’ll have the means to pay the new loan off within the next month, after your next payday in most circumstances, then you could benefit from this type of loan.
Payday loans offer the convenience of getting you money to repay your debt very quickly and without much hassle- the application process is usually fast and simple, and the money should be in your account within a day, so when there’s no other way to avoid default this can be a fast way to manage the situation. However, it is a temporary solution and the high interest rates of payday loans could mean that you’re left with a larger debt to deal with in a few weeks time.
Payday lenders generally offer smaller amounts than a debt consolidation loan would, so debt consolidation could be a better solution for many people. However, if your credit rating is too poor to qualify for most bank’s debt consolidation loans then this type of emergency loan may help you to avoid default.