What even is a default and why are they so bad for you?

3min read
Posted 10 December 21

Have you just received a phone call or letter from someone calling themselves a debt collection agency? When you default on a borrowed amount of money, it means you've missed several payments in a row. After that, credit providers get a little anxious and call in debt collectors to manage the missed payments.

The following steps you take after this will be necessary. If you don't act quickly, you risk losing your ability to secure future credit, and you might even be forced to give up your personal property to pay for the money owing.

The key is not to panic. We know getting that letter from a debt collection agency isn't a pleasant experience and can be confusing if you're used to dealing with a credit lender or provider. But the good news is that if this is the first letter you've received, it's still just a warning, and you can still act now to avoid more accumulated debt from piling up.

 

What does debt collection mean?

If you've received a default notice, it means several payments haven't gone through on a borrowed amount. This could be for a loan, credit card or another amount of borrowed credit. At this point, your credit score will drop, which impacts your ability to get good credit in the future. If you're unaware of why this is so important, maybe you should check out some of our other blogs on credit scores.

 

Why didn't my automatic payment go through? 

Did you check up on them? Automatic payments are a great way to keep on schedule, but they're not as smart as you. An automated payment will try to go through even if there's nothing on your account, so you might not even hear about it. When it does, your owing amount won't get paid. 

 

Why didn't my credit provider get in contact with me first?

They most likely did.

Have your details changed at all since you began borrowing? Or have you been missing emails or texts sent by your credit provider? Your creditor will be using whatever contact information they initially gave if you haven't updated your details.

Unfortunately, if that's the case, your missed payment will often go to a debt collection agency after 30 days. Debt collectors will do their search on you to find your contact details because they're paid to track down people who have missed record payments. This is why you might hear from a debt collection agency before your credit provider.
 

Ok, it's all starting to make sense. What can I do now? 

First off, is it possible your debt collector is a scam? This is pretty common — we've written a whole blog about keeping secure online. Make sure you talk to your creditor before arranging payments with the debt collection agency. If the agency they use for tracking missed payments matches the one that contacted you, it's not likely to be a scam. In that case, you should set up repayments with the debt collector. 

If the debt collection agency takes on the debt, you'll need to pay it to them. If not, you may be able to pay through your original creditor. It would help if you talked to the debt collector about finding a repayment arrangement that you can realistically afford to meet. Remember that they don't have to accept your offer and request that you pay the total amount.

 

What if I don't agree with the amount I owe?

You could dispute the debt if you don't believe you owe money or if you think you should owe less. Once in dispute, debt collection has to stop until the issue is resolved. 

But we can't promise this will work. The chances are that you will owe what's on paper so make sure to talk through with your creditor first if things aren't making sense. 

 

Extra costs.

When you default, you will accumulate interest payments and additional late fees. You'll get told all this by the debt collectors (legally, they have to inform you first), but if you feel like fees are sneaking up on you before you get a chance to respond, you can always dispute fees separately.

The critical takeaway is to set a repayment plan in play as soon as possible to limit the chance of fees piling up.
 

You mentioned giving up personal property.

If you take out a loan with security (aka a secured loan), you record something you own as collateral. In short, it's a way of saying your creditor can be sure of selling something of value you own if you can't make repayments. This is also sometimes called repossession and can be for anything of value (like a car or house), including the thing you're borrowing credit to purchase. Once sold, your account is frozen, which means no interest or fees can be added. But if anything is left owing, you'll still have to pay it off.

This may sound like a concern, but it will only happen if you miss payments and record items as collateral. We're also not telling you to avoid secured loans if that's your choice — we're just giving you the necessary information on them. They can help reduce interest rates because of that added security for lenders it's up to you what you want to risk. 

 

Anything else I should know?

A default will stay on your credit file for at least five years which means lenders can see why your credit score is low when they view your credit history.

The good news is that you can rebuild your score it just takes a little time.  
 

In short.

Defaults are scary to hear about, especially if you've no idea you had any missed payments. The key to avoiding them is always to check your automatic account is paying the correct amount because it'll keep trying to, even if the money isn't there.

If you do get a default, talk to your credit provider or the debt collection agency right away to find out if you can organise a repayment schedule. 

 

 

Disclaimer.

Info and tools on the Yonda website are used as a guide only and do not constitute financial advice. Use Yonda as a starting point and then seek professional advice.