A default occurs when a borrower has breach the debt contract between him and the lender.
Defaults are often due to payments that are overdue by more than 90 days.
This essentially means that 3 payments has been missed continuously. And lenders usually take this as a serious sign that action has to be taken or they risk losing money on a loan that has been granted to a borrower.
The idea is that the longer actions to recover the debt is delayed, the deeper a borrower might fall into financial disaster, and the lesser the chances of a lender to recover the debt.
When a borrow is in default, there is a breach of contract, leaving the lender with the legal right to commence recovery action such as foreclosure proceedings for mortgages.
Defaults are recorded with the credit bureau. And one would find it tough to obtain any other types of credit or loan facilities when there is a default on record that has occurred recently.
It must be noted that there is no standard rule on what constitutes a default.
A lender might very well classify a 30 day delinquency as one while another lender don’t even consider it until 90 days are reached.
Different credit facilities and loan products might also define defaults differently. A lot depends on the terms of a loan contract or facility letter.
Mortgage
In worse case scenarios of mortgages in default, a lender might put up the property for sale in an auction to raise the funds to pay off the outstanding loan balance that is due.
In best case scenarios, a borrower might wise up and find the funds to meet the debt obligations, plus any late payment charges, and reinstate the home loan.
Doing so will revert the situation back to normal before default.
If the outstanding payments are paid for but the late payment fees are not, then the excess charges can be accrued to the loan balance… which have to eventually be paid for. Otherwise the lender would not release the borrower from the mortgage.
Lenders usually give homeowner as much a chance reinstate the mortgage back to normal as possible because avoiding foreclosure is often a preferred move.
This is because foreclosure can be a tedious and costly affair that take up their resources that can be allocated to more revenue generating activities.
Moreover, repossessing someone’s home can generate bad publicity and have a negative effect on corporate branding.
This is one reason why banks don’t lend to places of religious worship… because the possibility of having to foreclose a temple, church or mosque can have dire public relations consequences.
Some form of loss mitigation is usually negotiated between the mortgager and mortgagee to come to some form of fair settlement.
Take note that due to the high value of property assets in Singapore, banks can easily recoup the outstanding debt by auctioning off the property. Yet this is often the least preferred move of lenders due to the reasons stated previously.
Personal loan
When a personal loans goes into default, the account would be sent to an internal collections department where their collections protocols would go into effect.
This could result in constant calls, emails, letters and text messages to demand payment.
If the loan is secured by a collateral such as a piece of art painted by Picasso himself, the lender would have the legal right to repossess it to liquidate and settle the debt.
Or if the loan is secured with blue-chip stocks, the lender can place a sell order so that funds can be raised to repay the debt.
Such is how the mechanics of secured loans work.
When it is an unsecured personal loan, it does not mean that a lender would not be able to force repayment through legal means.
This is because borrowers of personal are usually required to sign a personal guarantee for the repayment of the loan.
This essentially puts all the personal assets owned by a borrower at risk.
A lender could very well find it within their legal means to take a defaulter to court and place a lien on the borrower’s house.
This could also occur when there is no personal guarantee provided.
Any adult should know that banks don’t mess around and would use the full extent of the law to get what they feel belongs to them.
A full repayment would require the defaulter to repay the outstanding amount, plus any interest and late charges that has accrued during the whole ordeal.
At least interest rates would probably be much less than those for credit cards.
Credit cards
Credit cards are famous for the exuberant interest rates that are charged to outstanding balances.
And many cards actually shift to even higher interest rates when the number of days being delinquent increases.
This essentially means that by the time a credit card debt goes into default, the borrower would be swimming in overdue debt, interest charges and late payment fees.
On a side note credit card interest rates at below 20% per annum is almost unheard of in Singapore.
The longer the outstanding credit card bill is allowed to drag on by the borrower and lender, the more bloated the debt would become.
The dangers of credit cards that our parents and grandparents warned us about are not fairy tales.
At this point in time, the account would probably have already made it’s way to the collections department just like what was mentioned with personal loans.
Collection activities would commence.
One might think that everything would be alright once full settlement is done. But certain card issuers might have terms to meet and conditions to fulfill before revert the account back to normalized interest rates.
The borrower would have to abide by their rules to have a normalized account again.
Closing the account and registering for a new card with another bank might be considered. But other card issuers would know of the defaults since they are recorded in the individuals credit report.
So a defaulter would have little choice but to adhere to the rules stipulated by a lender.
