- 1 What Happens If You Default on a Car Loan?
- 1.0.1 [Summary] Default Car Loan: What Happens Next Anyone who finds themselves unable to make car loan payments will need to know what happens should they decide to default on their loan. There are a few possible scenarios depending on the circumstances, but in gen
- 1.0.2 Default Car Loan: What Happens Next
- 1.0.3 What Happens when You Default on a Car Loan?
- 1.0.4 Vehicle Repossession | Consumer Information
- 1.0.5 6 Ways to Pay Off Your Car Loan Early | Payoff Life
- 2 What Will Happen if I Default on My Furniture Loan?
- 3 Q: Does it make sense to borrow from my 401(k) if I need cash?
- 3.1 Find Out If Your Plan Allows Loans
- 3.2 Understand the Limits on How Much You Can Borrow
- 3.3 Factor in When—and How—You Have to Pay It Back
- 3.4 Think About What Would Happen If You Lost Your Job
- 3.5 Consider the Impact on Your Retirement Savings
- 3.6 Is There Any Way to Take an Early 401(k) Distribution Penalty-Free?
- 4 What happens if I default on my mortgage payments?
- 5 Yahoo!-ABC News Network | © 2017 ABC News Internet Ventures. All rights reserved.
- 6 Laid Off, Weighed Down by 401(k) Loan
What Happens If You Default on a Car Loan?
From: Internet Comment Copy link February 18
[Summary] Default Car Loan: What Happens Next Anyone who finds themselves unable to make car loan payments will need to know what happens should they decide to default on their loan. There are a few possible scenarios depending on the circumstances, but in gen
Default Car Loan: What Happens Next
Anyone who finds themselves unable to make car loan payments will need to know what happens should they decide to default on their loan. There are a few possible scenarios depending on the circumstances, but in general, it's safe to say that being forced to default on a loan is not an ideal position. Sometimes there's no other choice. If you've had to default on a loan, or if you're considering defaulting for whatever reason, you should be aware of the consequences and what happens next.
What Happens when You Default on a Car Loan?
If you do not meet the terms of your loan contract, may default on a car loan. Each contract stipulates the exact terms of default - whether it is a certain number of missed payments or failure to pay off the loan on time. Defaulting on any loan causes many negative financial repercussions for a borrower. Defaulting on a car loan will have specific, unique effects on your assets.
Vehicle Repossession | Consumer Information
Chances are you rely on your vehicle to get you where you need to go — and when you need to go — whether it’s to work, school, the grocery store, or the soccer field. But if you’re late with your car payments, or in some states, if you don’t have adequate auto insurance, your vehicle could be taken away from you.
6 Ways to Pay Off Your Car Loan Early | Payoff Life
Why pay more than your car is worth when you can pay off your car loan early?
About seven out of 10 people borrow money to buy their cars, and a car loan is one of the largest financial obligations you can have.
If you’re one of them, you may have a loan that will take you 60 or 72 months to pay off. That’s five to six years! That’s too much interest to have to pay. So we want to help you get out from under that loan faster and save money on interest by giving you 6 ways to pay off your car loan early.
Default Car Loan: What Happens Next Anyone who finds themselves unable to make car loan payments will need to know what happens should they decide to default on their loan. There What Happens when You Default on a Car Loan? If you do not meet the ter
What Really Happens if You Default on a Mortgage? Over the last few years, the housing market has seen steady improvement, and delinquency rates on mortgages have reached their lowest point since 2010. Despite the upswing, though, there are still nea
What Happens If You Default on Your Student Loans | Nolo.com The government has powerful tools to use against borrowers who don't make student loan payments. Here's what you can expect if you are in default on a student loan. (Learn how to get out of
Voluntary Repossession & Your Credit | freecreditreport.com Having your car repossessed hurts your credit more than voluntarily surrendering it. Learn why auto repossession might lower your credit score. How do I give back a financed car? According t
What Happens When You Default on a Credit Card Credit cards are part-convenience, part-curse for those who don't use them wisely. Pulling out the plastic to pay for things you can't really afford and only paying the minimum each month is the easiest
Will a 401(k) Loan Default Hurt My Credit? Q: I took out a loan against my 401(k) retirement account. Now I've been laid off. If I default on the loan, will it affect my credit score? I know that I will pay a 10% penalty and will have to declare the
What Happens If You Default on Your Student Loans Defcon 18 Pwned By the owner What happens when you steal a hackers computer zoz part What to Do If You Get Sued: Your 8 Step Plan - Smart Business Revolution "You've been served." Those three wor
Loan Defaults– Getting Rid of Debt when Defaulting on Your Loans A default on any loan is going to severely damage your credit score and leave you vulnerable to one or more collection procedures. The consequences of default depend on whether your loa
What Will Happen if I Default on My Furniture Loan?
What happens if I get furniture financed and than leave and don't pay the furniture but don't return it either? What is the worst that will happen?
Comments for What Will Happen if I Default on My Furniture Loan?
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Q: Does it make sense to borrow from my 401(k) if I need cash?
When cash is tight, your 401(k) can seem like a perfectly reasonable way to make life a little easier. The money is there and it’s yours—so why not tap it to pay off debt or get out of some other financial jam? Or you might be tempted to use it to pay for that dream vacation you deserve to take.
Stop right there. The cash in your 401(k) may be calling you—but so is your financial future. The real question here: Will taking the money today jeopardize your financial security tomorrow?
I’m not saying a 401(k) loan is always a bad idea. Sometimes, it may be your best option for handling a current cash need or an emergency. Interest rates are generally low (1 or 2 percent above the prime rate) and paperwork is minimal. But a 401(k) loan is just that—a loan. And it needs to be paid back with interest. Yes, you’re paying the interest to yourself, but you still have to come up with the money. What’s worse is that you pay yourself back with after-tax dollars that will be taxed again when you eventually withdraw the money—that9rsquo;s double taxation!
If you’re disciplined, responsible, and can manage to pay back a 401(k) loan on time, great—a loan is better than a withdrawal, which will be subject to taxes and most likely a 10 percent penalty. But if you’re not—or if life somehow gets in the way of your ability to repay—it can be very costly. And don’t think it can’t happen. A 2012 study by Robert Litan and Hal Singer estimated defaults on 401(k) loans were up to $37 billion a year for 2008–2012 as a result of the recent recession. There’s a lot to think about.
Find Out If Your Plan Allows Loans
Many 401(k) plans allow you to borrow against them, but not all. The first thing you need to do is contact your plan administrator to find out if a loan is possible. You should be able to get a copy of the Summary Plan Description, which will give you the details. Even if your plan does allow loans, there may be special conditions regarding loan limitations. While there are legal parameters for 401(k) loans, each plan is different and can actually be stricter than the general laws. So get the facts before you start mentally spending the money.
Understand the Limits on How Much You Can Borrow
Just because you have a large balance in your 401(k) and your plan allows loans doesn’t mean you can borrow the whole amount. Loans from a 401(k) are limited to one-half the vested value of your account or a maximum of $50,000—whichever is less. If the vested amount is $10,000 or less, you can borrow up to the vested amount.
For the record, you’re always 100 percent vested in the contributions you make to your 401(k) as well as any earnings on your contributions. That’s your money. For a company match, that may not be the case. Even if your company puts the matching amount in your account each year, that money may vest over time, meaning that it may not be completely yours until you’ve worked for the company for a certain number of years.
Example: Let’s say you’ve worked for a company for four years and contributed $10,000 a year to your 401(k). Each year, your company has matched 5% of your contribution for an additional $500 per year. Your 401(k) balance (excluding any earnings) would be $42,000. However, the company’s vesting schedule states that after four years of service, you’re only 60% vested. So your vested balance would be $41,200 (your $40,000 in contributions plus 60% of the $2,000 company match). This means you could borrow up to 50% of that balance, or $20,600.
Now let’s say that after ten years of service, you’re fully vested and your balance has grown to $120,000. The maximum you could borrow is $50,000.
The government sets these loan limits, but plans can set stricter limitations, and some may have lower loan maximums. Again, be sure to check your plan policy.
Factor in When—and How—You Have to Pay It Back
You’re borrowing your own money, but you do have to pay it back on time. If you don’t, the loan is considered a taxable distribution and you’ll pay ordinary income taxes on it. If you’re under 5&½, you’ll also be hit with a 10 percent penalty. Put that in real dollars: If you’re 55, in the 25 percent tax bracket, and you default on a $20,000 loan, it could potentially cost you $5,000 in taxes and $2,000 in penalties. That’s a pretty hefty price to pay for the use of your own money!
Before borrowing, figure out if you can comfortably pay back the loan. The maximum term of a 401(k) loan is five years unless you’re borrowing to buy a home, in which case it can be longer. Some employers allow you to repay faster, with no prepayment penalty. In any case, the repayment schedule is usually determined by your plan. Often, payments—with interest—are automatically deducted from your paychecks. At the very least, you must make payments quarterly. So ask yourself: If you’re short on cash now, where will you find the cash to repay the loan?
Think About What Would Happen If You Lost Your Job
This is really important. If you lose your job, or change jobs, you can’t take your 401(k) loan with you. In most cases you have to pay back the loan at termination or within sixty days of leaving your job. (Once again, the exact timing depends on the provisions of your plan.) This is a big consideration. If you need the loan in the first place, how will you have the money to pay it back on short notice? And if you fail to pay back the loan within the specified time period, the outstanding balance will likely be considered a distribution, again subject to income taxes and penalties, as I discussed above. So while you may feel secure in your job right now, you’d be wise to at least factor this possibility into your decision to borrow.
Smart Move: To lessen the odds of having to take a 401(k) loan, try to keep cash available to cover three to six months of essential living expenses in case of an emergency. (When you’re in retirement, you’ll want to have funds on hand to cover a minimum of a year’s expenses.)
Consider the Impact on Your Retirement Savings
Don’t forget that a 401(k) loan may give you access to ready cash, but it’s actually diminishing your retirement savings. First, you may have to sell stocks or bonds at an unfavorable price to free up the cash for the loan. In addition, you’re losing the potential for tax-deferred growth of your savings.
Also think about whether you’ll be able to contribute to your 401(k) while you are paying back the loan. A lot of people can’t, possibly derailing their savings even more.
Do You Qualify for a Hardship Distribution?
If your plan allows it, you might qualify for a hardship distribution. But doing so isn’t easy. First, you must prove what the IRS considers “immediate and heavy financial need.” In general, the IRS defines this as:
- Medical expenses for you, your spouse, or dependents
- Costs directly related to the purchase of your principal residence (excluding mortgage payments)
- Postsecondary tuition and related educational fees, including room and board for you, your spouse, or dependents
- Payments necessary to prevent you from being foreclosed on or evicted from your principal residence
- Funeral expenses
- Certain expenses relating to the repair of damage to your principal residence
The amount of the distribution is limited to your own contributions to the plan and possibly your employer’s contributions but doesn’t include earnings or income on your savings. It can’t be for more than the amount of the specific need—and you can’t have other resources available to cover it. Plus, you’ll have to pay both income taxes and a 10 percent penalty on the distribution.
Is There Any Way to Take an Early 401(k) Distribution Penalty-Free?
There are a few situations in which a penalty-free early distribution is allowed:
- You become disabled.
- You die and a payment is made to your beneficiary or estate.
- You pay for medical expenses exceeding 7.5 percent of your adjusted gross income.
- The distributions were required by a divorce decree or separation agreement (“qualified domestic relations order”).
As you can see, the IRS doesn’t make it easy to take your 401(k) money early under any circumstances!
What happens if I default on my mortgage payments?
Failure to pay your mortgage can add the cost of several charges to the amount you already owe. It can also hurt your credit score. And ultimately, it can cause you to lose your home.
Charges for late payment. If you are late in paying, you may be charged an additional late fee. Late payment charges can add hundreds of dollars to your mortgage account.
Charges related to non-payment. Your mortgage manager is the company that manages your mortgage loan account. If you default on your payments and become delinquent, your mortgage administrator may charge you for “non-payment services” which, over time, can add to your loan hundreds or even thousands of dollars.
Services related to non-payment may include:
- Property inspection to make sure that you are living in the house and to control that you are maintaining it.⦁ Property inspection to make sure that you are living in the house and to control that you are maintaining it.
- Preservation of property, including costs of services such as lawn mowing, gardening and repair, or the cost of covering windows or broken doors with boards.
- Foreclosure costs, which may include attorney’s fees, title-seeking fees and postal mailing expenses, and publication of foreclosure notices.
Damage to your credit score. Mortgage managers provide information about their payment history to credit reporting companies, which includes reporting whether you are late for a fee or omitting a payment. Even a single late payment lowers your credit score, which in turn affects your ability to get a loan in the future – and the interest rate that will apply.
Foreclosure. If you incurred default, your mortgage administrator can start the foreclosure process. This will not only add to the costs you will have to pay to catch up with your loan account, but also, the foreclosure procedure is a matter of public record. As a result, you will find it more difficult to obtain credit in the future to purchase another home. If you are unable to catch up with your loan or if you can not find any other solution, your home could be sold at a foreclosure auction. In several states, you will also be required to pay the “deficiency judgment,” the amount of which is made up of the difference between what you owe and the price you get for the house at the auction Of the foreclosure process.
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Laid Off, Weighed Down by 401(k) Loan
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In this economy, many of us are learning painful lessons. For some laid-off workers, one lesson learned is why it can be a bad idea to borrow money from your 401(k) retirement savings account, particularly when your job could be at risk.
Consider the lesson learned by a Michigan woman.
Q: I recently became unemployed through layoff due to a lack of work. I have an existing 401(k) loan with my former employer. My understanding is the loan is in default within 60 days of loss of employment.
My question is: Is there any way to continue to make loan payments in the agreed upon amount (previously payroll deduction) to prevent loan from being in default? If I continue to make the agreed upon payments on time, I do not understand why I am in default. I am still agreeing to pay the loan. Can my checking account be used for "401(k) loan automatic loan repay deduction" or can my husband who is employed have payroll deduction to continue to pay for my 401(k) loan?
I do not understand if I am able to continue to pay my 401(k) loan on time in the original agreed upon amount, why is the loan in default? I understand if I am ever late or miss a payment the loan would then be considered in default. A person should be able to make an effort to pay the loan off before being penalized especially in this tough economic time when banks are not lending etc. - L.B. Waterford, Mich.
A: L.B., you are encountering an unforgiving reality of 401(k) loans. And that reality is that in most cases, when you leave a job – whether by choice or by force – you will need to cough up some cash to pay off any outstanding 401(k) loans.
At the worst possible time, you are being told you must come up with $5,000, $10,000, $20,000 or more to pay off the loan that at one time seemed like a good idea. If you can't come up with the money, the loan will be declared in default and you will be hit with taxes and penalties that add insult to the injury of losing your job.
In a moment, I will review the rules in detail, but first let me pause to say there are exceptions to this situation and, if you are lucky, they could apply to you.
Some 401(k) plans will allow borrowers to continue paying off the loan after they stop working for a company that sponsors the plans.
At one company I'm familiar with, employees who leave can make arrangements to continue making monthly payments to the outside provider that administers the company's 401(k) plan.
In your case, L.B., I would first check to see if your 401(k) plan has such a provision. This could provide the answer you are looking for.
Check with the human resources office of your former employer, and also check with the company that runs the 401(k) plan. If you have trouble getting answers, ask for a copy of the Summary Plan Description that every 401(k) plan is supposed to have. In that document, there should be a section that addresses loans and what happens when a 401(k) borrower leaves the company.
There's no actual requirement that 401(k) plans make loans available to participants. The IRS rules allow them to be made, but it's totally up to the companies that sponsor these retirement savings plans.
Many employers allow 401(k) loans as a way to encourage workers to sign up for the plan, but they are just one more administrative headache and expense. That's why even if a company is willing to take on the burden for current workers, it's less likely to do so for former employees.
Quite honestly, L.B., I would be surprised if your 401(k) plan allows you to continue making payments on your loan rather than requiring you to paying it off all at once. But it's something you definitely you should research.
In most 401(k) plans, borrowers are required to pay off their loans when they leave a company, usually within 90 days.
If that payment is not made within the specified period, then the amount left owed on the loan is treated as a standard withdrawal that is subject to federal and state income taxes plus a 10 percent early withdrawal penalty is the borrower is less than age 59½.
For example, someone with $10,000 outstanding on a 401(k) loan when they lose their job faces the prospect of forking over that $10,000 when they need the money most – or possibly owing as much as $4,000 in taxes and penalties on the default amount. That could mean a scramble come April 15 of the following year when those taxes are due.
Either way, it's a choice between bad and worse for someone who has lost their job.
A recent Federal Reserve Board research paper took note of this cruel choice and suggested changes to the way 401(k) plans are structured.
Fed researchers Geng Li and Paul A. Smith proposed that 401(k) loans be made "portable" across employers, allowing the account balance and loan servicing move with employees when they change jobs. Also, they suggested, former employers could be required to continue servicing the loans of laid off workers so these unemployed workers aren't forced to come up with the money at the worst time possible.
"Given that 401(k) loan programs exist, it seems appropriate to design them in a way that minimizes financial risks to participants and maximizes 401(k) participation and contributions," Li and Smith wrote.
To that, I'll say, "Amen."
Unfortunately, such changes are unlikely to be in place anytime soon to help L.B. and others like her.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.