What to do if you can’t pay your loan in time

With the prevailing economic crunches due to the novel Coronavirus, chances are that you are cash strapped. Your business is bleeding, if not in a coma already, there’s minimal cash flow, no supplies coming through and if you took a loan for the business, you aren’t seeing yourself keeping your word to the lender.

If you fail to make on-time payments, your loan goes into default. Loan defaults lead to poor credit ratings (credit score). Missing further payments may lead to incurring other penalties and incurring interests. Legal action may follow if the situation is not adequately addressed. Other lenders, depending on the type of loan, will move to repossess your goods, stock or assets.

Here are a few things you may need to do if you are not able to pay your loan in time.

1. Change the terms of payment

If you think you’ll be late on a payment, you can try to let the lender know ahead of time to see if they’ll work with you to make payments more manageable. 

Select and income-based payment plan, that allows you to pay exactly what you can make in a month. Taking a lower amount will lengthen your payment period and perhaps increase your interests but it will give you a good credit score.

If you agree to change the terms of your contract, it’s important to get it in writing.

2. Call a credit counselor

The key is to work with a reputable counselor who’s not just trying to sell you something. In many cases, counseling is available at no cost to you. Depending on your situation, your counselor may suggest a debt management plan or another course of action.

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3. Learn your rights as a borrower.

Get to know your rights as a borrower. Read and understand the terms and conditions of taking a loan. If you fail to pay, and you are honestly not able, contact a lawyer and file for bankruptcy.

Bankruptcy could solve your problems, but there might be better alternatives. 

4. Deferment

If the situation is dire, you probably lose your employment or even close your business, consider taking a deferment. Deferment works best mostly if you are a student and you took a student loan and you aren’t able to pay in time.

A loan deferment simply postpones your starting time of repayment of the loan. Most likely the interest will accrue. The normal grace period for deferment is three years. 

5. Consolidate or refinance

You might be better off with a different loan. Especially with toxic loans like credit cards and payday loans, consolidating with a personal loan results in lower interest costs and a lower required payment. Plus, a new loan typically gives you more time to repay.

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6. Prioritize your payments

You might need to make difficult decisions about which loans to stop paying and which ones to keep current on. Conventional wisdom says to keep making payments on your home and other loans, and to stop paying unsecured loans (like personal loans and credit cards) if you must. The rationale is that you really don’t want to get evicted or have your vehicle repossessed.

Damage to your credit is also problematic, but it does not instantly disrupt your life in the same way. Make a list of your payments, and make a conscious choice about each one. Make your safety and health a priority as you choose.

7. Try secured loans

Consolidating with a secured loan can help you get approved if you want to pledge assets as collateral. 

In the wake of another loan default, you risk losing the assets securing your loan. The assets may get repossessed and that may leave you devastated.