If you take a loan, it should always be one you are in a position to repay. Defaulting on your loan may seem like an easy way out, but it can create problems that will plague you for years to come.
Secured vs unsecured loans
You can get both secured and unsecured loans from banks. A loan is considered secured when there is collateral (something to back the promise of the borrower), and unsecured if it is based on trust and the borrower’s reputation.
An example of a secured loan would be a car loan or housing loan. In these cases, the collateral (the guarantee that you will repay the loan) is the car or house in question.
If you are unable to repay your home loan, for example, the lending bank has a right to foreclose on your house.
Another type of secured loan, which is often restricted to affluent borrowers, is lombard lending. In these kinds of loan, the collateral can be almost anything of high value (e.g. a collection of vintage cars, antiques, or wine.) If the borrowers do not repay a loan, the bank will seize their collateral.
Hence, the consequence of not paying a secured loan is simple: you will lose whatever collateral you put up for the loan.
Most regular Singaporeans take unsecured bank loans
It is impractical for a bank to demand secured loans for small sums like $10,000 or $20,000. Yes, those are huge sums to an individual, but they are tiny in comparison to the amounts dealt with by big companies like banks.
For these small loans, the banks often use products like personal lines of credit, personal instalment loans, and credit cards.
These loans are not backed by any kind of collateral – the bank simply trusts that the borrower will make repayments, with any interest involved. If the borrower does not make repayment, the bank will eventually have to write off the debt as a loss; this means the borrower is in default.
This may sound like an easy way out for the borrower, but it’s not. There are dire consequences to defaulting on a loan that will affect your life goals in the long-run.
4 serious consequences of skipping your loan payments
1. Employment difficulties
If you have defaulted on your loans before, it will appear on your credit report.
If a debt is written off and you made no effort to negotiate or settle it, the default will remain on your report indefinitely. If you made satisfactory attempts to settle the debt, such as through credit counsellors, then defaults or partial defaults are removed from your credit report after three years.
A potential employer cannot check your credit report, but they can request to see it. Some companies have stringent policies against hiring people who are in debt, or who have defaulted before.
A hiring manager may take this as a sign of irresponsible behaviour, or may decide that your financial woes will affect the quality of your work.
In some industries, such as finance, jobs can be near impossible to get with a poor credit report (few people would trust a financial advisor with a long list of defaults!)
2. Having money seized from your accounts
This depends on the bank in question and the terms and conditions involved. But under some circumstances, if you have money in the lending bank, they may be able to take it and use it toward repaying your debt.
Check the details before you sign off on a loan.
3. Legal proceedings
If the bank suspects you have the money but simply don’t want to repay it (this does happen), they will initiate legal proceedings. Based on the contract that you signed for a loan or credit card, you are legally obliged to pay back your debts.
You will usually receive the first legal warning if you have not made repayment in more than 30 days. However, legal action may take place sooner under some circumstances (e.g. the bank finds out you are planning to leave the country.)
4. No access to crucial loans
If you don’t repay your loans, this will be reflected in your credit report. A poor credit score will make it difficult to obtain crucial loans, such as a home loan or education loan. This will deprive you of important financial opportunities.
For example, people unable to get a home loan are often forced to rent. This is a significant waste of money, as they are unable to own a home to rent out or resell.
Those unable to get education loans may struggle to find better job opportunities, or obtain promotions.
So while getting your debt written off may seem like a good thing in the short term, the real costs are seldom worth it.
All the above may make it seem like loans are horrible and that under no circumstances should you consider getting a loan. That is not the case at all.
As with all financial products, prudent management, strategic use, and discipline to comb through all the necessary terms and conditions are key to making them work for you – and not the other way round.