What Happens When Someone Cannot Repay A Loan?

When borrowing money, consumers should know that the principal amount and interest must be paid in full within the term of the loan. Those who are unable to service their debts accordingly for whatever reason are advised to seek debt restructuring to extend the term of the loan with the view of making it easy for them to settle the outstanding balance. Most lenders are happy to refinance loans, so this option is always on the table. If a debtor is unable to pay the loan, there is a well-defined debt recovery procedure that must be followed by the lender. 

Learn more about debt recovery procedure

Money Loaning Companies

These are corporate entities that engage in the business of lending money to individuals and businesses with the view of making a profit from the interest charged. The loans they offer can either be secured or unsecured. In the case of secured lending, borrowers are required to provide collateral, which serves as security against the loan amount advanced. In many cases, the value of the collateral must be the same as the amount of money borrowed or higher. This means that if the borrower defaults, it will be easy for the lender to recover their money by selling the collateral to offset the outstanding balance. This is not to say that unsecured loans cannot be recovered because the law provides money loaning companies with debt recovery options. 

Customer Doesn't Pay

When payment is expected, but not made on time, the next step is to invoice the debtor. The invoice will show the amount due, the due date, and payment details. The customer must be informed or reminded to pay the loan. The next step is to chase after the unpaid invoice. This is done by sending emails to the debtor, making phone calls, and sending messages to inform the debtor that their payment is overdue and the matter will escalate further if the debt is not cleared. After chasing invoices, the next step is to put a credit hold on a client's account. This means the lender will stop doing further business with the client. A final notice must be sent to the client before legal action can be taken. 

Legal Action

When a client has refused to pay or is unable to pay their debt, legal action can be taken against them. The first option is to take the defaulter to a small claims court. The court will order the client to pay the principal amount, interest, and other fees. The alternative is to engage the services of a debt recovery specialist. This is a professional who specialises in debt recovery and is authorised by the relevant government agencies to help clients recover their debts. They usually help courts to enforce recovery orders under a judgment. It is also possible for money lending companies to enforce recovery orders if they can get guidance, tools, materials, and advice. Once the debt has been recovered, lenders are required by law to report the default to credit referencing bureaus to caution other lenders against lending to the defaulter.