Tick... tick… boom: What happens when you miss a loan payment

Just the other day I came across a taxi driver who, without knowing what I do for a living, proceeded to tell me how he was juggling his repayments on his house and his taxi.

He was literally juggling – he could not make the minimum on both the house and car at the same time and was switching between them. He made a few payments to the taxi company, then the bank, struggling to recover. Unfortunately, his situation had already slid into a big mess. Not knowing all the details, I really hope it is not past the point of no return for him and his family. (Apparently his wife had just taken over the money management. Good move.)

Missing a loan repayment is a much bigger deal than it seems. How do I know this? I’ve been there. Some years ago, after going through redundancy at work,  I watched as a credit card balance spiralled out of control. I wouldn’t wish it on anyone.

And when I say spiralled, I mean it spiralled up – from a just-about manageable $6,000 balance to north of $9,650 in seemingly no time.

Hold on, you might say, aren’t loan balances supposed to always go down as you pay them back, not up? How is that even possible?

Unfortunately, it is a very real scenario if you miss any repayments.  It’s a seemingly small thing that can eventually wreak havoc on your finances and cause long-term damage.

Statement shock

These days I’ve been poring over balance statements gone horribly wrong – anonymous examples of people who have got into trouble with their car loans, personal loans or hire purchase agreements.

It all starts out well. The credit experience begins with getting the new stuff, the loan granted and the repayments being made on time. No worries.

But then something unexpected happens. It always does. And without an emergency fund to fall back on, a payment gets missed.

And that’s when the fees kick in. Default fees, default interest charges, even $25 charges for each letter sent and phone call made just to let you know you are running behind. Loans can slide backwards even as much as $100 a week.

Now most of us, being eternal optimists, think we’ll just recover the next time we get paid. And we might. But the many fees out there make this more and more difficult. Over time, without help, they can bury you.  And you may end up wondering why, after months of making extra payments, you are not making so much as a dent in your loan.

When loans go backwards

Here’s one horror story I looked at: a car loan gone tragically wrong. The Holden Commodore cost $30,000 in May 2011, which must have sounded like a normal price to the buyer at the time. The repayments were high, though: $467 a fortnight.

When we’re buying, those are the only two figures we think about – the overall price and the minimum payment. Can we make that? Yet we tend to overestimate how much we can take on in the short term.

Unfortunately, there were some more numbers that got loaded on right away:

• Establishment fee: $1,500
• Broker fee: $1,500
• And unbelievably, repayment insurance for the lender: $4,495

Now these were unusually high and should have been questioned. Even before the borrower made a single repayment, that loan balance swelled to $37,495!

Things started out okay for the first few months, with the borrower making those $467 payments as agreed. Then the trouble started, and when they were due to make the sixth payment, they were only able to pay $200. And the penalties hit:

• Default fee: $10 per week
• Default interest: 5% on top of the 19.95%

Despite the borrower following up with a payment of $667 to recover, the balance quickly grew to $37,808 anyway because of the fees and interest. Shocking, isn’t it?

Don’t hesitate to get help

Now in hindsight, the moment to get help is immediately before having to miss a payment. Many lenders will help by adjusting a loan so you can get things back on track. And budget advisers are available to help negotiate on your behalf. But for most of us, if we are left to our own devices, things will rapidly go from bad to worse.

For 19 months, our car buyer kept making payments on this loan, getting nowhere fast. Even though they made a few payments of as much as $600, they never caught up and were always in arrears. Exasperated, they could not understand why they had poured $14,270 into the loan without any result. There were probably more dents in that car than in the loan!

The balance grew as high as $37,579, and the car was almost repossessed.

In other cases it gets worse.

Had the car been repossessed, it would have no longer been worth it’s original price of $30,000. Most cars depreciate horribly. Let’s say it was worth just $12,000.

Yet the amount still owed would have been that $37,579 – so guess who would have been left holding the remaining $25,579?

Yep, the car buyer – with only the loan to show for it.

How do you recover from something like that?

Get help right away

Someone you know or you yourself may be coping with debt that’s got out of control. If you or they are about to miss a repayment or have already done so, don’t hesitate: call a budget adviser at 0508 BUDGET.