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July 20, 2019 / By Jared Cohen

Loan Default and Practical Measures to Avoid it

Loan default is the state when the borrower fails to repay the loan amount as per the agreed terms and conditions. When a default occurs, the lending body may accelerate the balance amount to be paid or take legal action against the borrower for breaching the contract. Either way, this would negatively affect the borrower’s credit score, and reduce the chances of securing a small business loan in the future.

It is very important to plan how you are going to repay the loan amount even before applying for it. This way, you can maintain your credit history and make sure that you never lose access to capital in case your business requires some additional credit-based funding at some point. Below is a quick look at what happens in a loan default scenario, as well as some practical ways to avoid loan defaults that you can work out if your business faces a tough financial situation someday.

Talk to the Lending Party

The first step that you should take in case you are struggling to repay the loan amount is to contact the lender and see if they can offer you any assistance. Sometimes, the lender might arrange a different payment plan, extend the term, or postpone some payments. However, that would depend upon how healthy your relationship with the lender is.

Pay the Sum Possible

After you have communicated your current business situation to the lender and expressed your struggles in repaying the amount, tell them how much you can pay. Most lenders allow making small micropayments to avoid full-blown default. This would also build more trust between you and your lender, who might then offer a more flexible payment plan for you.

Consult a Debt Counselor

If you are in no situation to make any kind of payment, you should consider consulting with a debt counselor to figure out your options. They can help you prepare a debt management plan and offer some suggestions on how to pay down the balance due as practically as possible.

Consult a Bankruptcy Lawyer

If the loan default has already happened, it might indicate that bankruptcy is not far away. As that can lead to even bigger consequences on your credit and your finances, you should consult an experienced lawyer to understand how to proceed with filing for bankruptcy.

Note that once a loan default happens, it would take around a month to show up on your credit score. Even if you can manage to pay off the balance loan amount after that, the negative points on your credit history might not come off. In fact, it can stay on your credit report for as long as up to 7 years.

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