Impact on Credit Score
One of the major risks of defaulting on a personal loan is the negative impact it can have on your credit score. A default can stay on your credit report for up to seven years, making it difficult to qualify for future loans or credit cards. A lower credit score can also result in higher interest rates on any future credit you do qualify for, costing you more money in the long run.
Legal Action
Another risk of defaulting on a personal loan is the possibility of legal action by the lender. The lender may sue you in order to recover the unpaid debt, which can lead to court judgments and wage garnishment. Legal action can result in additional fees, penalties, and stress for the borrower.
Debt Collection Efforts
Defaulting on a personal loan can also result in aggressive debt collection efforts by the lender or a third-party collection agency. You may receive frequent phone calls, letters, or even visits from debt collectors trying to recoup the unpaid debt. Debt collection harassment is illegal under the Fair Debt Collection Practices Act, but it still occurs and can be a source of stress for the borrower.
Damage to Relationships
Defaulting on a personal loan can damage not only your financial health but also your personal relationships. Borrowing money from friends or family members and defaulting on the loan can strain or even break relationships. It is important to consider the impact defaulting on a loan can have on your personal connections before taking out the loan.