In the world of personal finance and lending, the implications of loan default can have far-reaching consequences, affecting not just the borrower but also the financial institutions involved.
And in Singapore, a city known for its robust financial sector and thriving money lending industry, the threat of loan default has special implications. So in this article, we’re looking into the consequences of defaulting on your loans, whether its from banks or money lenders in Singapore.
Negative remarks on credit reports
Defaulting can have a negatively long-lasting impact on an individual’s credit history if they miss or make late payments.
For example, you have a credit card with a monthly minimum payment of $150. If you fail to make the payment for two months, the bank may report two consecutive 30-day late payments on your credit report. If you have previously had a credit score of 750, it may drop to 680 or lower.
The money lender may report this credit score report to credit bureaus. A default status is a serious negative mark on your credit report, which makes it challenging to enter credit or loans in the future.
The money lender can also sell or transfer your debt to a collection agency to report the debt on your credit report.
If the money lender indicates that they do not expect to collect the full amount, they can ‘charge-off’ your debt. A charge-off is the most serious negative sign that can damage your credit in the future because the money lender can indicate that you are unable to repay a debt as agreed.
Higher interest rates on any new debt
Defaulting often results in the accumulation of interest and additional fees. Money lenders are legally allowed to charge late interest and late fees on overdue payments.
Accumulation of interest
The ‘late interest’ or ‘default interest’ is typically higher than the standard interest rate specified in your loan agreement, and may continue to accrue on the overdue amount until you settle the outstanding balance.
Let’s say you took a personal loan from a licensed money lender in Singapore with an annual interest rate of 8%. Your monthly instalment is $700. If you miss a payment, the lender may apply a late interest rate of 12% of the past-due amount. If your outstanding balance after a missed payment is $8,000, your late interest will be calculated as follows:
Late Interest = ($8,000 * 12% per year) / 12 months = $80 per month
Money lenders impose late fees or penalty charges for either missing or late payment. These fees and charges vary depending on the money lender and the terms of your loan agreement.
If you consistently remain in default, interest and late fees will continue to be added to your outstanding balance every month, making it more difficult for you to catch up on payments.
Bad total debts
The worst-case scenario is if you miss two monthly payments in a row with your total debt outstanding, including interest and late fees. For example, if your original loan amount was $15,000. Missing two payments could increase your outstanding balance to $15,500 or more, depending on the terms of your loan.
Seizure as collateral
Defaulting may result in the money lender seizing the collateral to recover the outstanding debt. If you default on a loan secured with collateral, the bank may seize your pledged assets or money. Mortgages, auto loans, and secured loans are the most popular forms of consumer debt backed by collateral.
Let’s say you take out a personal loan for a piece of real estate (residential property) that can be stated as collateral of $200,000 from a bank in Singapore. This loan has a term of 5 years with monthly payments.
Unfortunately, you are experiencing financial difficulties and have missed several monthly personal loan payments in a row. The bank considers the loan to be in default.
As a result of this default, the bank has the legal right to confiscate the residential property that you used as collateral. The bank decided to sell your property to recover the loan balance and successfully sold the property for $250,000 at a real estate auction.
Auction proceeds in the amount of $250,000 from the sale were used to cover the outstanding loan balance, which includes the remaining principal, accrued interest, and other related costs such as the outstanding loan balance of $200,000, accrued interest of $10,000, late fees of $2,000, and legal fees of $5,000. So, the total debt accumulated is $217,000. As a result, there is a surplus fund of $33,000 from the sale proceeds.
Because the sales proceeds exceed the total debt, there is no shortfall balance in this scenario. This means you will not be sued for a lack of balance.
However, it will be a different story if the sales proceeds are less than the total debt. If this happens, the borrower still has debts that must be paid. If they are unable to pay, money lenders or banks can take legal action to record the shortfall in debt payments.
Money lenders can take legal action to recover the debt. If the court rules in favour of the money lender, the borrower will be required to pay the debt plus legal costs.
Legal actions may vary depending on the money lender, the type of loan, and the local laws and regulations. Usually, money lenders will file a suit against you to obtain a judgement for the unpaid amount.
If the court rules in favour of money lenders, the court will issue a judgement in the form of a legal order stating that you owe the debt and determining the amount you must pay back.
With a court decision, money lenders can relate to your professional activities and request an order to deduct part of your salary directly from the company you are working with until the debt is paid off.
Alternatively, money lenders can obtain a bank account levy, allowing them to withdraw funds directly from your bank account to pay off the debt.
Lastly, depending on the type of debt and the laws in your jurisdiction, the lender can place a lien on your property (for example, real estate) or seize certain assets as collateral to pay off the debt.
Keep FOMO and be smart
Borrowers should know the consequences of borrowing from money lenders in Singapore. That way, they will have a clearer understanding of their financial responsibilities and borrow money that is within their financial capabilities.