In perusing promissory notes recently, I came across several lenders who increased the margin on their private loan product when a borrower is in default. As for what constitutes default, all lenders reviewed include among their default triggers, the following condition, "I fail to make any monthly payment to you when due." Please note that this post is based on analysis of current promissory notes and may not apply to loans originated in previous years.
So, what adjustments can lenders make to interest rates when a default occurs? Let's go to the videotape, I mean, let's go to the 6 point font of these promissory notes, which has convinced me that reading glasses are not that far off:
- PNC: Loan margins may increase 2% upon default.
- Chase: Loan margins may increase 3% upon default.
Note: For reference the first item listed under Section 20 is "...you are in default if: (1) you fail to pay any payment when due..."
- SunTrust: Loan margins may increase 2% upon default
OK, I know that I will hear from lenders saying that their current policy is NOT to raise interest rates when a borrower is late with a payment (that's what late payment fees are there for), so borrowers have nothing to worry about. Hmm..this argument may sound familiar. Anyone who has seen their credit card's interest rates rise for no apparent reason might be skeptical of such claims. The only point that I would make is that these lenders CAN RAISE YOUR INTEREST RATE IF YOU ARE LATE WITH ANY PAYMENT. YES, THEY CAN.