Even in the best economic times, any number of factors might cause you to fall behind on your loan payments. But the pandemic has thrust many more people into difficult financial situations.
If you’re struggling to repay your loans — or if you’re already slipping behind schedule — here’s your action plan for bouncing back.
Typically, if you’re just a few days late, you’re still within your loan’s grace period. During a grace period, you can make your missed payment without incurring any penalty. Check your loan documents to see how long your grace period is.
When your loan payment is late, your loan is in delinquency. After the grace period, you may owe interest, late fees, and costly penalties — in addition to the payment(s) that you missed.
And your credit score can take a bit hit as well. Most credit scoring systems heavily consider how well you repay your loans. So, a single missed payment can knock as much as 100 points off your FICO score. And that stays on your credit report for up to seven years, potentially making it harder for you to get financing in the future.
After a predetermined amount of time, your loan’s status changes from merely delinquent to being in default. For a mortgage, the period until default might be just one month. But some types of financing may wait several months before the loan is considered in default.
Once your loan is in default, your lender may take significant action to seek repayment. Your loan will likely be sent to a collections department or agency. They’ll contact you for repayment.
And, if they don’t get it, they may seek foreclosure on a home with a mortgage in default, repossess a car whose loan is in default, or even sue you. That litigation can result in a judge’s order that allows your lender to garnish your wages or put a lien on your assets.
When you fall behind on your loan payments, what should you do? You’ll usually have several options for getting on top of the problem and stopping the damage:
Pay the loan before you default.
Legally, creditors can’t report your late payment to the credit bureaus until you’re at least 30 days late. So, if you can pay your bill within that time, you’ll dodge the damage to your credit. You may still need to cover a penalty if your payment is past your lender’s grace period.
And, even if you’re past the 30 days, catching up on payments can save you from going into default.
Focus on your most important loans.
If you’re low on cash, you may need to choose which loans to pay this month and which ones to underpay or skip entirely. If that’s your situation, focus on the loans with the greatest impact.
For most people, you’ll want to cover your mortgage and your car loan. That way, you’ll still have your home and your transportation — even if you’re behind on your credit card payments.
Understand your rights as a borrower.
Debt collectors are bound by the Fair Debt Collection Practices Act, which outlines rules under which they must operate. Before you deal with a debt collector or decide how to deal with an old debt, read up on your legal rights.
Look into deferment or forbearance.
Debt deferment and forbearance may be options if you fall behind on student loan payments, but you’ll need to apply. Both options allow you to avoid loan default by postponing some or all of your loan payments for a period of time — usually several months to a few years.
If you’re experiencing an approved hardship, you may qualify for deferment, which may stop interest from accruing during the deferment period.
Talk to your lender.
If you truly can’t pay, your lender may be willing to work with you. Give them a call, explain your circumstances, and request a hardship plan for repaying your debt. If you’re suffering financially because of the pandemic, ask about their COVID-specific relief programs. These programs might include deferred payments or elimination of late fees.
Work with a credit counselor.
Need some help in navigating your finances? A certified credit counselor may be the expert guidance you need. Your credit counselor will review the specifics of your financial situation and suggest a course of action for managing your debt.
They’ll typically help you create a balanced budget and propose an option like debt consolidation, a debt management plan, or debt settlement.
Look for additional financing.
Particularly if you’re falling behind on high-interest debt — or if you’re in danger of losing your home or car — you may want to look for more financing. With that loan or line of credit, you could cover the missed payments of your original loan. And you might be able to do it at a lower interest rate.
Keep in mind that shifting your debt isn’t a long-term strategy. But it may buy you the breathing room to get current on your bills and stay on top of them moving forward.
Once your payments are on back on track, you’ll want to stay timely going forward. These strategies can help you stick to your payment schedule:
1. Set up automatic payments. If paying your bills manually has you forgetting important dates, remove the human error from the equation. Many banks and lenders allow you to schedule recurring payments. So, you can pay the $250 you owe on your car loan each month automatically with just a one-time setup.
2. Make a budget. Is a cash shortage what’s keeping you from prompt payments each month? Sketch out a budget that lists your essential expenses. And include the monthly payment on your loan as one of those costs. Reconfigure your non-essential expenses as needed to ensure you have the cash to cover your loan payments.
3. Maintain a healthy emergency fund. Sometimes your budget takes a beating if you have an unexpected bill to pay. An emergency fund can provide the extra cash you need that month to cover that bill while you continue to pay on your loan.
4. Refinance or consolidate debt. High interest rates might be draining your wallet. Look into the possibility of paying off high-interest debt with a lower-interest loan through a refinance or debt consolidation.
5. Contact your lender proactively. Your lender has a vested interest in being repaid. If you truly can’t make the payments, they may be willing to set up a workable payment plan before you wind up in arears.
When you miss required loan payments, you want to minimize the damage quickly. And knowing what steps to take is key. Then, you can be proactive in getting your credit and your financial health back on track.