What happens if I stop paying my loan?


Consequences of a Loan Default | Moneymax

Are you close to a default? Unexpected situations, such as job loss, medical emergency, death in the family, or calamity, can put even the most responsible borrowers in a difficult position, making it extremely difficult to repay on time.

There are serious financial consequences for defaulting on a loan, plus you will spend stressful days and sleepless nights thinking about how to get out of a tight spot.

You don’t want to reach that point and you can prevent it from happening. Don’t let defaults affect your finances.

What is a loan default?

A default results from non-payment of monthly loan payments for a certain period, as specified in the terms and conditions of the loan. It should not be confused with default of payment,[1] that happens as soon as you miss a mortgage payment. A default is declared when your loan remains in arrears for a long time.

The length of time before a loan goes into default varies from lender to lender. Typically, borrowers in the Philippines have a maximum grace period of 90 days or three months to settle their outstanding balance before their loans are in default. This is the case with Pag-IBIG multipurpose loans and home loans.

Some banks have shorter grace periods before declaring a default. Citibank, for example, defaults a personal loan if it has been unpaid for at least 60 days.

Read more: Smart tips to improve your personal loan application

Can you go to jail for non-payment of a loan?

consequences of loan default - can you go to jail for not paying a loan

consequences of default – can you go to jail for not paying the loan

The Bill of Rights under Section 20 of Article III of the 1987 Charter states that “No one shall be imprisoned for debt”, which means that debt collectors will not be able to send you to jail for not being able to settle your debts. But that doesn’t mean you can just run away from your creditors.

Atty. Romel Regalado Bagares, professor of international law at Lyceum University, explained how “the non-payment of debts is only of a civil nature and cannot be the basis of a criminal case”. It only becomes dangerous when you start committing fraudulent acts to avoid paying your loan.[2].

When you intentionally issue bad checks or abandon your residence without notifying your creditor, these actions can be used against you in a criminal case. So think twice before you decide to run away from your problem.

What happens if the personal loan is not paid in the Philippines?

1. Your debt will pile up

If you default on your personal loan, you will owe more money as the lender will ask you to repay the overdue balance, interest, penalties, and other fees in full and immediately. For each month that your loan is not repaid, you will have to pay a late fee of 7% to 10% of the outstanding balance or from PHP 200 to PHP 600, whichever is greater.

Simply put, stopping your personal loan repayments can quickly get you into debt.

In addition, the lender will not only close the unpaid loan account, but also your other existing loan or credit card accounts with them. Worse yet, your unpaid loan account will go to a collection agency, which will increase the pressure for you to pay off your loan.

Read more: 7 reasons why your personal loan application was rejected

2. The lender will repossess your car or house

consequences in the event of loan default - repossession

consequences of loan default – repossession

Vehicle repossession and foreclosure are among the worst things that can happen to any borrower. These are the risks of default on secured loans such as auto loans and home loans.

In order to recoup their losses, lenders will take back the loaned car or home when you don’t pay off the loan. For example, if you have received an SSS home loan, the SSS will foreclose the property as soon as you have not made the six monthly loan payments.

Banks and other lenders will put the asset up for sale in a public auction. If the price of the repossessed property is not enough to cover the unpaid loan, you will still be liable for the difference in amount.

3. Your credit score will go down

If you don’t pay off your loan, your credit history will suffer. Banks report unpaid loan accounts to the credit bureaus responsible for calculating your credit score. With a bad credit history, you will get a lower credit score, which will reduce your chances of getting a loan or credit card in the future. If you are lucky enough to be approved for one, you might qualify for a higher interest rate.

Read more: Do you have bad credit? What to know when applying for a loan

4. Unpaid government loans will be deducted from your benefits.

unpaid government loans

unpaid government loans

Failure to repay your government loan may affect your benefits. For example, if you default to a SSS Salary Loan, SSS will deduct the loan balance, including penalty and interest, from your retirement, disability or death benefits. For those who know how to pay off their overdue SSS loan, you can apply for the SSS loan restructuring program to help you catch up on your loan payments.

Loan Default During COVID-19

If there is one thing that can force you to default on your payment, it is the COVID-19 pandemic. Fortunately, the Credit Information Corporation is on the side of defaulters. Recently, CIC urged banks and private lenders not to report defaults during the pandemic[3].

According to CIC President and CEO Jaime Casto Jose Garchitorena, banks must guarantee consumer rights amid a national health crisis. “We are one with the national government to promote and protect the collective interest of our citizens during this unprecedented time,” Garchitorena said.

Garchitorena also said the CIC is ensuring that financial institutions submit accurate data to ensure a fair review of each borrower’s credit history and financial condition during the pandemic. “The CIC system is not just a negative or blacklist because it allows lenders to decide how to mark outstanding loans and to be in sync with the government’s issuance on the matter,” he added.

Bangko Sentral ng Pilipinas (BSP) also gave banks until December 2021 to reclassify delinquent loans in areas affected by COVID-19[4]. This will give borrowers more time to avoid defaulting on their loans.

Read more: 10 Sulit Ways To Use A Cash Loan Into The New Normal

Final thoughts

To learn more about the consequences of a default, ask the lender or government agency you borrowed from. You can also search for the section on default in your loan terms and conditions. When you’re about to default on your loan, study the fine print of your loan and find solutions from there.

Before the worst gets worse, contact your lender to explain your situation and negotiate the term of your loan. If you have an SSS loan that has defaulted or is about to default, consider taking advantage of the Loan Restructuring Program to facilitate your loan payments.

Compare other personal loan options

Below is a list of trusted personal loan companies and their loan features. Compare your options and apply through Moneymax!

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Citibank personal loan

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EasyRFC multipurpose loan

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SB Finance personal loan

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TALA personal loan

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