What Happens If You Default on an Unsecured Loan?

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If a credit user defaults on an unsecured loans, he opens himself up to collectors who have a financial stake in collecting the debt according to Debt.org. Collection agencies are skilled at pressuring people to repay their debts, and some are not above violating consumer rights.

When it comes to unsecured loans, there isn't any collateral for the creditor to take in order to satisfy the loan. Most places will offer a grace period before they start charging late fees and calling. At 30 days late, they report it to the credit bureaus, and the responsible party's credit score takes a hit. At 60 days, there is a risk of more fees, an interest rate hike if applicable and more persistent phone calls, plus the credit hit. At 90 days, the account will be moved to the company's internal collection department, and credit is yet again affected. Between 120 and 180 days, the debt will be written off, which means the creditor counts it as a loss and sells it to someone else.

The collection agency now has a vested interest in trying to obtain a payment. Sooner or later, the collection will reach an attorney and sue after a final warning. If the debt is deemed valid by the court, then a judgment will be issued, and the defaulter will be responsible for the debt and the legal fees. A lien may be placed on the debtor's house, and bank accounts could be levied, depending on the judgment.