Missing any repayment of your personal loan can have serious consequences in Singapore. While it is the last thing that comes to your mind when you obtain the loan in the very first place, it can become a big financial headache if not tackled carefully.
You miss an installment and boom! You no longer can enjoy the benefit of low interest for future loans. Moreover, failure to pay the loan back can create an adverse effect on your credit score. And as a result, a bad credit score leads to rejection from most mainstream banks in Singapore.
Although a personal loan offers plenty of advantages when in need, defaulting on it can put a stop to your financial planning.
What happens when you don’t repay your personal loan?
A personal loan is indeed a beneficial option for people who are urgently looking for cash. It offers flexible repayment periods and attractive interest rates as compared to other types of loans available in the market. Due to the ease of application and quick disbursement, a personal loan is accessible to many people in Singapore.
If you have taken an unsecured personal loan, no need to worry! Your assets won’t be subjected to seizure by the lender in the event of default. Whereas, if your loan was secured with your assets as collateral, those assets will be at risk if you don’t make repayments in the loan.
Defaulting on any loan can create big financial difficulty. Here are some consequences you may face for not repaying it on time.
1. Interest will continue to occur
This is one of the first things to happen when you default on your personal loan. The interest charges will continue to accumulate. What will be the result? It will become harder to pay off the outstanding loan amount along with the heavy interest accrued on it. Especially, if the loan interest rates are already high, the amount to pay back will become huge.
Not only this, the banks or financial institutions may also impose charges for making delays in repayment. If you have obtained your personal loan from a licensed money lender in Singapore, do remember that they may charge up to a 4% late interest fee per month. If you continue to be a defaulter, suppose for a year, this fee will be 48% of the loan, which is almost half of the outstanding loan amount.
2. Loan tenure will be unnecessarily extended
Non-repayment of the personal loan can allow the lenders to restructure your loan terms. This includes extending the remaining loan period as well. As a result, you will have to pay a higher total repayment obligation with an increase in the total interest amount and late payment charges.
3. Your credit score will be adversely affected
Non-repayment can cause your credit score to fall down. A credit score is a sign of your likelihood to pay a debt. Banks and financial institutions largely evaluate loan applications with applicants’ credit reports. A lower credit score has a high chance to decrease your credit score drastically. Once your credit ratings fall, you will be classified as a ‘high-risk’ client who has a higher risk of defaulting on loans. This makes the lender charge higher interest from you on any type of loan.
The Credit Bureau of Singapore has issued the stages of probability to default. It can be read as under:
| Range of Credit Score | Risk Grade presented by alphabet | Probability to default ( Min to Max) |
| 2000 but up to 1911 | AA | 0.00% to 0.27% |
| 1910 but up to 1844 | BB | 0.27% to 0.67% |
| 1843 but up to 1825 | CC | 0.67% to 0.88% |
| 1824 but up to 1813 | DD | 0.88% to 1.03% |
| 1812 but up to 1782 | EE | 1.03% to 1.58% |
| 1781 but up to 1755 | FF | 1.58% to 2.28% |
| 1754 but up to 1724 | GG | 2.28% to 3.46% |
| 1723 but up to 1000 | HH | 3.46% to 100% |
Your credit score is an important tool not only for banks but for yourself too. It can have far-reaching implications if not cared for. If your risk grade is anything below AA, expect the lender to charge a higher interest rate and low principal amount. The loan amount and interest rates are highly dependent on your credit score and risk grade of yours.
Click Here to read: How Do Credit Scores Affect Business Loan Approval?
4. Your loan applications may face rejections in the future
Due to a negative impact on your credit score after defaulting in repayment of a personal loan, you may not be able to get a loan in the near future in times of need. Bankers and financial institutions typically check your credit score and if they find any red signal in your credit score, they may reject your application right away.
Your past repayment history highly matters in Singapore whenever you try to apply for a new loan. Hence, you should avoid making any delays in the repayment of loans or paying off monthly interest charges to save yourself from any rejections.
5. Legal proceedings can come into your way
If your bank has suspected that you don’t want to repay your personal loan even if you have money, they can initiate legal proceedings against you in no time. You are legally obliged to follow the terms mentioned in the loan agreement either for a personal line of credit or any other type. You have to pay your debts back, otherwise, the bank can enforce the rights written in the loan contract.
If you fail to repay your loan within 30 days of the due date, you will usually receive the first notice/warning from the bank. You must note that banks may also issue a warning even before 30 days under special circumstances. For example, if the bank finds out you are leaving the country, it can initiate legal proceedings against you even before the notice period ends.
6. You will face employment difficulties when you default on your loan payment
It’s going to appear in your credit report if you don’t pay off the debt. In a case where the debt has been written off and no adjustments or restructuring has been done to settle or negotiate it, the default will continue to appear in your credit report for an indefinite time. If you make efforts to settle the debt with the help of credit consultants, then default or partial defaults on the loan are removed from the credit report but only after three years.
The potential employer does not have the access to check your credit score, but he/she can always request to see it. In Singapore, few of the companies have strict rules to not hire people who are in debt currently, or who have defaulted before. Anyone who is in a hiring position can take it as a sign of irresponsible behavior or even may decide that your financial dues will certainly affect the quality of your work. Industries like finance look closely when it comes to hiring employees. There are near-to-impossible chances of hiring a person with a poor credit score.
7. Seizure of money from your bank accounts
Any seizure of money in your bank account depends upon the terms and conditions of the loan and the bank in question. However, under special situations, if you have money in the lending bank only, the money might be subject to seizure if the loan is not repaid on time. They may proceed to use it to repay the outstanding debt.
Click here to read Pros and Cons of Debt Consolidation
How can you avoid late repayments or defaults in a personal loan
You can make repayments on time to save yourself from the debt trap. All it takes is the management of the funds effectively. Nobody wants to experience the unwanted consequences of a default on repayments.
LoanBuddy shares with you some effective tips to manage your personal loan in a smart way.
- You must draw a budget plan to make sure you don’t miss any repayment. The budget will track the record of your monthly spending from the income you earn by repaying your installments on time.
- You shouldn’t use the money you draw from a loan to fund your unimportant expenses. The borrowed money should only be used to achieve your financial goals.
- You can create a reminder of the repayment date and ensure you never miss a repayment. This saves you from paying extra charges like late fees and high-interest charges.
- You should avoid applying for a new loan if you are already burdened with repayments of one. If you take multiple unsecured loans at once, you are probably at risk of default. Having too many loans at one time creates chances of missing anyone’s repayment on time.
Conclusion
If you think you cannot make your repayments on time, you should talk to your loan consultant as soon as practicable. We advise considering how and from what sources you are going to repay the loan before applying for any loan. You must make sure you are making repayments on time in line with the schedule.
LoanBuddy compares different loan options in Singapore and advises on the best loan product without any bias. Connect with our loan consultant to find out about various loan products and financial instruments.
Also read: Here’s the list of the top 5 profitable businesses to start in Singapore.
