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How to deal with banks & personal loan default

Defaulting on a personal loan can be scary. What will happen to your credit?

Can the bank place a lien on your property? The good news is that even if you can't pay your personal loan now, there are steps you can take to get back in control of your finances and manage your loan with the help of the lending bank.

Examine your loan agreement and understand your loan type. Most personal loans are unsecured loans, meaning that the bank does not have any of your property as collateral that they can keep if you do not pay your debt. If you have an unsecured personal loan, the bank can report your default to a credit bureau, send your debt to a collection agency and get a judgment against you in a county court (CCJ -- county court judgment) for the amount that you owe, plus any legal fees. With a CCJ, they may be able to garnish your bank account or wages. If you have a secured personal loan, the bank can keep and sell your collateral to offset your debt. Your loan agreement will detail the exact procedures your bank can use to collect on your loan and when these procedures will be implemented.

Start communicating. If you have to default on a personal loan, let the lending bank know immediately. The longer you wait to talk to them, the fewer options you will have to manage the problem. As soon as you know you can't pay your bill, whether you think you can't pay for one month or if you think you won't be able to pay for a sustained period of time, call them or visit your bank branch. The bank doesn't want to see you default on your loan either, so they may be willing to offer you solutions like reduced payments or temporary suspension of payments and fees. Be ready to discuss the reason behind your default. If you have had a medical problem, divorce, been terminated from your job or have any other major cause for the change in the financial situation, they may have specific programmes to help you. If they don't offer solutions, suggest some yourself. If you can handle a reduced payment, suggest that you pay a comfortable amount for a set period of time. According to the financial advice website Motley Fool, telling them that you may have to file bankruptcy if you can't reach a solution may make your bank more willing to deal with you.

Request a settlement. If you want to draw a line under your loan and can come up with lump sum of cash, ask the bank to settle the loan with you for less than you owe. For instance, if you owe £3,250, you can try to get the bank to agree to accept £1,950 to consider the loan closed. You would then need to pay the £1,950 in full for the agreement to take effect. You can handle the negotiations yourself or leave it up to a debt settlement company. Expect to pay a fee if you use a debt settlement company. Unless you negotiate otherwise, the debt settlement will appear as a negative mark on your credit report.