4 Serious Consequences of Not Paying a Loan – Executive Digest

4 Serious Consequences of Not Paying a Loan - Executive Digest

The collateral behind a loan

A loan is considered secured when the borrower offers the asset that is the purpose of the loan as collateral for the financial institution. This is the case with mortgage credit to buy a house, if the person in question does not pay, the house goes to the bank. On the contrary, with an unsecured loan, as the name implies, a good reputation and trust in the debtor are assumed as a guarantee.

When taking out a loan from a financial institution, it must of course have guarantees that it will receive back the amount of the capital lent plus interest. Otherwise there would be no loans – it seems intuitive.

First of all, it is necessary to know that a loan is carried out with a contract. In that sense, there is a product that is sold – money – and a service that is made available – credit – by an entity – a financial institution – with a cost to be paid for this transfer – interest.

Since it is an agreement, there are rights and obligations for both parties, so the consumer should be aware that the right to access other people’s capital also includes an obligation to return it.

In addition to the mortgage, there are other precautions in this area: it is, for example, having a guarantor or taking out payment protection insurance when taking out the loan (in case of illness and unemployment).

If you find yourself in a default situation, try renegotiating the credit with the bank through a term extension or debt consolidation.

We reap only what we sow

This is the story of Cristina, a customer with a difficult credit history who, due to financial difficulties, was unable to pay the debt she had taken on credit for her minivan overnight due to financial difficulties. Let’s look at the consequences of this attitude.

  1. Difficulty finding a job

Anyone who already has a default situation on the payment of a credit, however minimal, keeps that record in credit history with the Bank of Portugal (called Central Credit Responsibilities – CRC). This happened to Cristina with the first small loans she took out to go on vacation and buy new prescription glasses, the payments of which were delayed for a few months.

In this particular case, Cristina managed to clear her name at the Bank of Portugal (BdP) because she found a part-time job at her neighborhood bar over the weekend, eventually paying off the debt in full and settling the situation. Nevertheless, the record of months in which there were payment problems remains in the CRC.

Although it is not common practice in Portugal, an employer may ask to see the credit history of a person they are about to hire. This was the case with Cristina, whose responsibilities map was consulted by the staffing firm where she was in the hiring process and radiated an image of irresponsibility. They eventually got the feeling that Cristina’s financial incidents would affect the quality of their work.

If I were to run for a position in the financial sector, it would be even more certain that I couldn’t. Which employer entrusts a financial advisor with a list of defaults?

  1. legal proceedings

What Cristina should have done right away was to try to renegotiate the debt with the bank. The point is that people understand each other and could have extended the loan term and paid a lower term.

However, Cristina didn’t even bother and the financial institution eventually found out that she had the money and she just didn’t feel like paying (trust me, this really happens!). Since the credit is a contract, after a month of default, she immediately received the first legal notice to remember.

  1. Salary promise

One of the major legal ramifications for those who owe money and already have the process in court is the garnishment of salary. If you remember correctly, this measure was largely taken in Portugal in 2013, pledging millions and millions of euros in wages to the bank.

Cristina eventually suffered these serious consequences for not paying for her van: because her monthly salary was promised, she had the national minimum wage (530 euros) net per month available for her expenses. Until I paid for the car in full, that was it.

However, keep in mind that wages below the minimum wage cannot be pledged.

  1. Cut off access to an essential loan

As with everything in life, we cannot harvest strawberries if we plant oregano. When Cristina couldn’t pay off her debt, she kept a record with the CRC of the months she failed until her salary was promised.

When he finally ran out of MPV credit, he wanted to buy a cheap T1 on the outskirts of his town, but he couldn’t. The fact that he had a difficult credit history meant that he forfeited the financial opportunity (extremely important, by the way!) to acquire a house after living in a rented room for so many years.

Given the opportunity to buy a house, staying in a lease is a waste of money. The same thing would happen if Cristina wanted to go back to school to get the Masters in Management and Strategy she’s always dreamed of – how many job openings would she not have or how many promotions within the companies she went through would she be denied?

Moral of the story: There are mistakes that aren’t worth it. Better to go out of your way to tighten your belt than (even if it’s only for a month!) to fail. The real costs of defaulting on debt, no matter how small they may seem, can have long-term negative consequences for a person’s life.

Before participating in a personal credit solution, consider whether you really have the ability to pay off the debt in full and not tarnish your name unnecessarily. Be careful not to pressure your effort percentage. Until then, it is best to find out what factors banks value for personal credit and compare all personal credit solutions to choose the most suitable one.