Your responsibilities as a borrower

When you agree to borrow money from a lender, you enter into a legal contract. It’s your responsibility to ensure that you fully understand this contract before you sign it. Your signature tells the lender that you agree to meet your obligations by repaying the loan according to the contract.

Things to consider if you can't make a loan payment

It can happen to anybody. So if you are unable to make a monthly payment, here’s what you should do:

• Contact the creditor immediately, before the payment due date. Your call demonstrates your good faith. Most creditors are willing to make alternative arrangements if your situation has changed.
• Don't wait until the due date has passed or until the creditor calls you. Waiting puts you at a disadvantage when dealing with your creditor and that’s the last thing you want.
• Ask for a grace period. If it's a one-time occurrence, your creditor may give you a grace period, allowing you time to get your financial affairs in order.
• Renegotiate your loan terms. If your situation has permanently changed, your creditor may extend the term of the loan. That will spread your payments over a longer period of time, giving you room to breathe each month and reduce your stress.

The consequences of ignoring your loan obligations

A loan is a legal obligation. If you fail to meet the terms of the loan agreement, your creditor has the right to take court action against you to recover the balance of the debt. This could happen in several ways.

• If the loan is secured by a chattel mortgage, the creditor is entitled to take possession of the property that you have signed over as security. The creditor can then sell the property and apply the proceeds against the outstanding balance of the loan.
• If there is no chattel mortgage on the loan, or if you did not pledge any assets as security, the creditor can obtain a court order. A court order grants access to other goods that you own, which similarly can be sold to compensate for the default.
• If your spouse or some other person co-signed your loan application, the creditor will usually transfer the demand for payment to that person.
• If you were the sole signer, your creditor may resort — again by court order — to garnisheeing your wages. This means that the money you owe to the creditor will be paid directly by your employer. Until the full amount of the debt is repaid, your earnings will no longer pass through your hands.

You can probably prevent these consequences by being proactive and taking the steps outlined above. If your financial difficulties are serious and you cannot resolve them yourself, then you should consider credit counselling. These services are available through your lending institution or through an independent agency.

The last resort

If you are in over your head and can’t work out an arrangement with your creditors, then as a last resort you can declare personal bankruptcy. Bankruptcy will free you from most, if not all, of your debts. But it’s a painful experience and you’ll pay a very high price for this freedom. All of your assets other than your personal essentials may be sold by a bankruptcy trustee. Other than the money to cover the trustee's fees, the proceeds from the sale will be distributed to your creditors. What’s more, a bankruptcy stays on your credit record for a number of years. It will take considerable time and effort on your part to restore your credit rating. Bankruptcy is a drastic step, and may cause you and your family a great deal of hardship.