A report from the Experian Consumer Default Index in 2017 showed that over R13.45 billion worth of consumer debt resulted in a default that year. Based on their data, the highest rate of defaulting on loans came from unsecured personal loans. This is followed by credit card debt and vehicle loans. Home loans have the lowest rate of loan defaults in South Africa.
Defaulting on loans isn’t a rare occurrence in the country. However, this doesn’t mean you can just let this happen since everyone seems to be defaulting on their loans and yet they’re still okay. The situation is not a joke and the repercussions can be grave.
So what do you do when you default on loans? What are the things you can do to recover from it?
What Happens When You Default on a Loan
If you have a secured loan, the creditor can take possession of your collateral in exchange for the remaining loan balance. They usually sell it to recover a portion of the unpaid amount. If the property sold for a lower price than the amount you owe, you’ll most likely be required to pay for the difference.
For unsecured loans, creditors may require a portion of your salary to be deposited to them until your balance is paid off. Additional fees may be charged as a penalty for failing to repay the loan on the agreed terms.
Lenders will have to undergo a lengthy process before they resort to repossession or other means to recover the money you owe them. The following steps describe in general the process you and your lender will undergo when you default on loans:
- They will reach out to you so that both parties can come to an agreement on how the loan can be repaid without resorting to repossession. Your lender will get in touch with you via SMS, phone, or email. They will give you a grace period to settle your debts first.
- If you fail to respond to their notifications, they will forward your details to their collections department and have them follow-up on your case on their behalf.
- If you still fail to comply with their amicable approach, your lender will be forced to take legal actions with the help of lawyers. You’ll be receiving letters from these people, forcing you to pay your balance. Most likely, you’ll be paying for the cost your lender spends on getting legal service.
- The next step is to escalate your case to a court. You’ll also be tagged by the credit bureau and you’ll receive a large downgrade on your credit rating.
- The court will take a look at your situation and decide whether to seize assets of equal value as repayment for your remaining balance or require you to pay for the loan using other means. They may request you to restructure your loan to ease repayment conditions.
When you default on a loan, your creditors will get in touch with you first. If you ignore this communication and forego settlements, you’ll likely receive summons and eventually face judgment.
When worse comes to worst, creditors can seize your assets, get a portion of your monthly income, and tag you as a blacklisted individual. The latter will make it very hard for you to take a loan again.
The law prohibits sudden repossession of properties. However, the ugly truth is that creditors will get back what you owe them no matter what happens.
The Next Steps to Take
There’s no need to panic when you default on a loan. Contrary to what people believe, lenders can’t seize your property in an instant. Lenders are required by law to negotiate first with a defaulting client before they can proceed with foreclosure or repossession.
To avoid worst-case scenarios when you default on loans, always keep in touch with your lenders. If you’re summoned for not paying your debt on time, attend the meetings and negotiate a deal with your lenders to find a way to repay your loan. Last but definitely not least, always read the fine print. Know what you’re signing and identify if the contract can jeopardize your finances when things don’t go your way.
It’s still possible to get out of loan defaults in South Africa. These are the methods you can take to recover and rebuild your finances from a default:
- Full repayment of your loan
- Loan rehabilitation
- Loan consolidation
- Seek help from organizations that specialize in helping people in your situation
Although the first option is the most practical step to take, it’s also the most challenging to do. This is why most people go for loan rehabilitation or consolidation.
When you’re about to default on your loan, communicate with your lender immediately to notify them the possibility of the scenario. Banks usually allow loan restructuring to make it easier for you to repay the debt.
You may choose to enter debt review or get counselling to identify which path will best suit your situation. Financial experts suggest that you go for debt counselling when you’re really having trouble repaying your loans. Do this immediately to avoid making the situation worse.