A loan, whether it is a large sum or a small sum, is a long term financial commitment.
It means committing to a number of repayments. If the repayments are not fulfilled, there are a number of consequences, all unfortunately negative.
You can very easily impact your credit file very drastically.
It is something to be taken seriously and with consideration beforehand in order to avoid such dire consequences.
But, how do loans work? What happens when a loan is not paid on maturity? And, what does maturity mean?
We are going to look at the different aspects of loan maturity, and what it is that you commit to when taking out a loan.
What Does Loan Maturity Mean?
So, what does maturity mean?
Maturity is the date at which your loan term is finished. All loans, when taken out, will have a specific number of days in which you must repay them.
Normally, there is a set end date to the term of the repayment. This is the date of maturity. The day which your loan must be repaid by, including all of the interest.
Sometimes, there is a fee to pay on the date of maturity to completely settle the loan and all its terms. Though, this is not a major common practice.
Normally, when the maturity date comes and if all the repayments have been made, that is the end of the story.
When the date of maturity comes, and if and only if the loan has been repaid in full as per the terms and conditions of the initial borrowing agreement, the loan will be counted as satisfied and complete.
This means basically that you will owe nothing more, and you have successfully adhered to your terms and conditions of borrowing.
In some cases, for example, conditional lending for a car loan, the lender still has the right to withdraw the assets from you.
This will happen if you fail to pay and communicate the reasons for failed payments.
That means, ultimately, you could end up losing your vehicle, or house even, and still be accountable for the recovery of the debt.
The Consequences Of Going Past Your Maturity Date
It is strongly advised to not allow the loan to go past your date of maturity.
Why? Well, there are a couple of strong arguments against it.
Firstly, is the negative impact on your credit file.
Secondly, is the interest rates.
Thirdly, is the consequences for the future.
Negative Impact On Your Credit File
Different things influence your credit score. It is an overall number marked on your handling of credit products and other financial aspects of your life.
When you take out a loan, or sign a loan agreement, as soon as your signature is on the contract, the loan is on your credit file.
When the loan is on your credit file, what you do next will have a major impact negatively or positively on your future credit rating.
If you allow your loan to go past its date of maturity, you are essentially allowing your credit score to drop drastically.
These types of defaults are not taken lightly, and the impact is immediate.
This will ultimately affect any future opportunities with regard to borrowing. You limit your options, and it takes years to recover from.
Interest Charges And Other Fees
When you take out a loan contract, there are terms and conditions.
A part of this will be the interest rates.
Interest rates are the rates on top of the amount borrowed. If you have a better credit score, it is likely that your interest rates will be lower.
If you have a low credit score, you may only be able to access credit with high interest.
If the loan is not paid by the maturity date you will potentially be liable for extra interest charges and fees.
Other fees include late payment fees, failure to pay fees, admin charges, and even further down the line, lawyer and court fees if the debt is taken to court to be recovered.
There is sometimes a fee to be paid on the date of maturity. If this is the case, this will have been clearly communicated to you before you signed the terms and conditions of borrowing the advanced sum.
If you pay the fee, the loan terms will end and count as fully satisfied.
We have explored the future consequences a little, now it’s time to dig a little bit deeper.
The immediate consequence will be that the loan terms have not been satisfied, and therefore you are liable for charges and recovery action.
The best thing to do, when struggling to repay a loan or a debt, is to communicate with the lender.
More often than not, the lender will work with you, listen to your circumstances, and collaborate on a mutually agreeable resolution.
If the loan is done and dusted by the date of maturity, this will have a good impact on your credit rating. It will also make it more likely for you to obtain future credit products.
If the loan was for a specific asset purchase, you will own it completely. The lender will have no further claim on your property.
However, if this is not the case, you will be exposed to possible removal of property.
That means everything you have paid so far becomes null and void, as the product was not properly in your ownership, to begin with.
The lender, as stated in their pre-contractual terms, will be able to take possession of whichever asset whether that be a house or a car. This is called a repossession.
Ways To Find A Resolution
If you are in this position, don’t lose hope. There are always ways forward!
As we have briefly discussed, the best way to find a resolution that is satisfactory to both sides ie lender and borrower is to open up communication channels.
Ignoring the debt will only make it worse. It can accrue interest at a fast rate, and not to mention the late fees.
Ultimately, the debt is in your name and must be resolved by you.
The way to avoid court summons and extra legal fees on top of the existing amount due is to settle up before this happens.
If possible, avoid further borrowing until the problem is resolved.
What happens when a loan is not paid on maturity?
The answer is that you incur interest charges, late fees, and a low credit score which will only continue to decline. There are steps you can take to avoid this happening.
If you are aware of financial struggles, and you know that the loan will not be repaid on time, it is worth making your lender aware of this.
Remember, the maturity date of a loan can chop and change.
Sometimes it is a fixed procedure, and other times it can change depending on interest rate fluctuations, how reliably payments are being made, and your personal financial situation.
To avoid losing your asset, or being unable to obtain future credit lines, keeping up with your specific loan terms is the only way forward.
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