What is a significant consequence of defaulting on a loan?

Defaulting on a loan typically leads to significant negative impacts on an individual's financial situation, one of which is potential legal action from creditors. When a borrower fails to make payments as agreed, lenders may respond by initiating various collection efforts, which could include lawsuits to recover the owed amount. This can escalate into legal proceedings, resulting in garnishment of wages or additional collection actions that further complicate the debtor's financial health and increase overall debt.

In addition to legal action, a default can severely damage an individual's credit score, making future credit more expensive or unavailable. Options that imply positive outcomes, such as increased credit limits, improved credit scores, or lower interest rates on new loans, are misleading in the context of a default. Instead of receiving benefits, individuals in such a situation often face financial challenges that can take years to resolve.