Loans and credit are the primary drivers of the economy. They allow businesses and individuals to take out large sums of money and pay them back over time. The individual or business benefits by having the money they need, and the bank or lender benefits by charging interest on the loan and turning a profit.
This ideal scenario doesn’t always play out as intended, however. Sometimes, a loan goes into default and the bank is at risk of losing money. Then, bill collectors start calling, and late fees start adding up. Anyone currently in this situation may benefit from reaching out to credit repair specialists who can help them get back on track.
Failure to Pay
A default is not a single event. Rather, it refers to any time a payment or several payments are missed. Once a person starts to miss payments, they are considered to be ‘in default.’
Typically, a borrower is given several opportunities to pay past-due amounts. After repeated collection attempts, a financial institution may give up trying to contact the borrower and pursue other options. However, the consequences begin long before this stage.
Consequences of Defaults
The first and most obvious consequence to borrowers is late fees. Most lenders will list their late fees in the loan or credit documentation. Sometimes, this is a percentage of the loan, and sometimes, it is a set dollar amount.
Secondly, interest rates may increase dramatically. Because the bank sees a borrower in default as high-risk, they will increase the interest rate in an attempt to recoup additional money.
When Late Becomes Really Late
To be clear, being a few days late with a payment isn’t the end of the world. The problems truly start once a payment has gone more than thirty days past due.
At this point, the lender starts notifying the credit reporting bureaus that the borrower is more than thirty days late. A single thirty-day late payment can cause a credit score to plummet. A fifty- or one hundred-point score reduction is not uncommon, causing individuals to become ineligible for new loans or credit cards.
Collection Agencies
For large amounts, such as auto loans and mortgages, the lender may attempt to seize the property. Next, they will often sell it to regain lost funds. Regarding smaller amounts, the lender often gives up on reaching the borrower and will sell the debt to a collection agency.
The first thing a collection agency will do is inform the credit reporting bureaus that there is an open collections account. This causes a credit score to deteriorate further.
Collection agents work on a commission basis, and the prospect of a hefty commission can lead agents to use the collection account as a bargaining chip.
In collections, Pay for Delete may also be offered. This practice means the company will delete the collection account from the credit report entirely if the amount is paid in full.
No matter what, paying the debt will result in the account being closed. Though it will still be listed, it will be marked as ‘paid,’ which helps a person’s credit score recover.
How Credit Repair Can Help
Reputable credit repair companies, such as The Phenix Group, can assist people in a credit crisis. Together with their clients, a credit repair firm will examine the debtor’s credit report looking for any inaccuracies.
Aside from genuine debts, a person’s credit report may contain a host of inaccuracies that are detrimental to their credit profile. Reputable credit repair companies can reach out to collections agencies, creditors, and the credit reporting companies to set the record straight.
Once inaccurate items are removed, a person’s credit score rises quickly. This makes them eligible for loans, grants them lower interest rates, and can help save them thousands of dollars. Reach out to The Phenix Group for your free consultation today!