Default Charges / Penalty Fees

In taking a personal or business loan, you have to be responsible with repaying it and when due. Failure to pay your due obligation to your lender or financial institution results in default and a fee is charged. This is usually stated in your loan agreement with your lender; and by executing the contract, you have consented to it.

The default fee is a penalty for not repaying your obligations as and at when due. A default occurs when a borrower is unable to make timely payments, misses payments, avoids or stops making payments. Individuals, businesses, and even countries can default if they do not keep up their debt obligations. Default risks are often calculated well in advance by creditors.

Once your obligation is due and not repaid, the penalty fee automatically kicks in, and this accrues daily until payment is made. The penalty or default charge becomes part of your indebtedness and cannot be separated from your total obligation to your financier. It is to be paid in full when repaying the borrowed funds. In other words, when you resume payments, you are obligated to pay the full sum due, including the accrued default charges.

For instance, your repayment is due on the first of each month and you miss the first two repayments; every day this payment is left unpaid, the default fee accumulates. This is dependent on the percentage stated in the loan agreement. The default fee is also a function of the number of payments missed, as well as the number of days it takes to repay your matured obligation.

Also, note that when you incur defaults on your loan, it forms part of your credit score and impacts your credit history. Payment history plays a big role in your credit score, making up 35% of the overall score.

Defaulting is similar to having your bank account overdrawn (that is, in a negative balance), which could arise from not funding your account to cater for a maturing obligation. The longer it takes for you to clean up your account, the higher the charges applicable to the negative balance, and the bigger its impact on your credit history. You, therefore, want to ensure you sort this out quickly enough with your financiers to avoid a bad credit record. According to credit bureau Experian, a default will stay on your credit reports and be factored into your credit scores for seven years.

Highlights

• It can also be referred to as, Default fee, Penalty fee, Unauthorised Overdrawn Charges or Late payment fee.
• A default occurs when a borrower is unable to make timely payments, misses payments, avoids or stops making payments on interest or principal owed by the due date.
• Once you incur it, this becomes part of your indebtedness and cannot be separated from your total obligation to your financier.
• Defaults can have consequences, such as lowering credit scores, reducing the chance of obtaining credit in the future, and raising interest rates on existing debt as well as any new obligations.
• According to credit bureau Experian, a default will stay on your credit report and be factored into your credit scores for seven years.

In conclusion, if for any reason you are unable to make repayments when due, contact your financier and immediately ask for a restructure of your matured obligations. You may be charged a small amount as restructure fee, but this is small compared to the default fee which would be accrued, or the impact being in default would have on your credit score.

References https://www.investopedia.com/terms/p/past-due.asp https://www.investopedia.com/terms/d/default2.asp https://www.investopedia.com/terms/l/late-fee https://www.investopedia.com/terms/d/defaultrisk.asp

Originally published at https://blog.biznurture.loan on April 22, 2021.