It is common for most of us to look out for loans whenever pressing financial needs strike while we have no cash by our side to sort them out.
Regardless of the compelling reasons behind taking out any loans, we must clear them together with the accrued interest within the timeframe agreed at the time of taking out the loan.
But unfortunately, sometimes unforeseen things do occur, making us unable to clear these loans fully on time. The amount left unpaid past the agreed date is called an overdue loan.
Understanding how to calculate this amount is crucial as it can help us know the consequences that can arise and the options we have.
Overdue Loan Calculations
To calculate the total amount of loan overdue, take the amount unpaid on the agreed payment day and add the accrued interest.
Overdue Loan= (Accrued interest + amount unpaid at payment day)
To determine the amount of interest accrued,
Multiply the amount outstanding (at the predetermined pay date) with interest applicable when the amount became overdue. And then multiply the results by the number of days for which the amount is owed.
Accrued Overdue Loan interests = (overdue loan x number of days) x (applicable interest)
Total Loan Overdue = (amount unpaid at payment day) + (outstanding loan x number of days) x (applicable interest)
Note: If the lender impose penalties and other fees due to late payment, they will add to the total amount overdue.
To understand better, consider the following example:
Amount of unpaid debt = $2000
Late days = 30 days
Interest applicable on payday = 0.03%
In the above case, the calculation for the total amount overdue would be as follow
$2000 + ($2000 x30x0.03) = $2,180 + (Any penalties or other fees imposed by lender)
What Are the Implication of Overdue Loans
To help you understand why you should clear all of your outstanding loans while you have time, we will highlight the effects of overdue loans on your financial life.
- Overdue Loans Harm Your Credit Score
One thing that suffers the most when you can’t clear your loans is your credit score. Although most lenders won’t report you immediately, a loan that has been left unpaid for more than three months past the agreed payday will prompt them to forward your details to various credit bureaus.
If they do this, your credit score will suffer the most – meaning your chances of getting a loan offer from the same lender or another lender will decrease drastically.
- Penal Interest Rate
When taking out a loan, it’s a good idea to, first of all, come up with a well-planned repayment strategy. Doing so will help you to not only avoid impacting your credit score negatively but also to avoid penal interest rates.
Penal interest rates refer to additional interest rates and fines imposed by lenders on borrowers who don’t clear their loans on time. When such interest and penalties are levied on you, they complicate your loan repayment burden. Consequently, it would help if you strived to avoid them by paying your outstanding loans before you run out of time.
- Loss of Security
If you took secured loans, e.g. loans against properties, Gold loans, or loans against your securities (Bonds, Shares, Mutual Funds, etc.), the outstanding overdue loans could cause you to lose your stakes.
What happens is that, after the expiration of the repayment period, the lender will send reminders that your loan is in arrears so that you can settle it. If you don’t honor the reminders for up to 90 days, the lender will have no other option other than selling everything you pledged as the loan collateral.
- Dealing With Debt Collectors
Other than forwarding your details to various credit bureaus, lenders will also notify reputable debt collectors. These are people or organizations that specialize in helping lenders recover overdue loans.
Dealing with debt collectors isn’t something you will like as they can be ruthless. Some of them employ dirty and illegal debt collection tactics, while others will follow the legal procedure to get you clear the loan.
When dealing with debt collectors, it is easy to end in jail – try to avoid all these inconveniences by honoring all your outstanding loans before they become overdue.
What Option Do You Have If You Can’t Have Your Loan Cleared on Time?
As previously mentioned, unforeseen occurrences can cause you not to pay your outstanding loans on time even when you have the goodwill. When that is the case, it would mean any or all of the above consequences can happen to you. But fortunately, there are a few things you can do and lessen the impacts of overdue loans. These include
- Notifying Your Lenders
Come out clear and tell your lenders that you may be unable to settle the loans as per the agreed dates due to specific issues (which you will explain to them)
- Consolidate Debts
If you have several types of loans from the same lender, then you have the option of combining them so that you pay as one loan. This is important as it helps to save you money on interests and makes borrowing more affordable.
- Prioritize Debts
Categorize your debts as either priority or non-priority. Priority one should include things such as mortgage and utilities. Non-priority include credit cards and other unsecured loans.
Begin with the prioritized ones, as they can cost you the most if the lender decides to go tough.
The Bottom Line
While long term loans bad credit no guarantor should help you overcome financial constraints, it’s so unfortunate that they can end up causing more financial wrangles than you had when taking them out. Fortunately, this does not have to be the case. You can avoid it by borrowing for the proper purposes and making prompt payments.
Note: Loans only become a nuisance when left unpaid.