When it comes to financial decisions, understanding your options fully is key. Strategic default is a decision that borrowers make when they decide to stop making payments on their loan. Understanding the risks associated with this tactic is a must for any business professional, as it could have a significant and long-term impact on their financial future.
Understanding Strategic Default
In a nutshell, strategic default is when a person stops making payments on their loan, even though they have the capability of doing so. This might occur if borrowers don’t wish to continue paying the loan’s full amount due to high interest rates or other reasons. Strategic default is a conscious decision taken by borrowers to stop making payments on their loan, thus they assume all consequences that could arise from such an action.
Risks of Strategic Default
One of the risks of strategic default is that it negatively impacts a person’s credit score. In fact, the long term effects of this decision could cause a borrower to have difficulty obtaining credit in the future. Another risk of strategic default is that, depending on their loan’s terms and conditions, a borrower may be responsible for paying back the full amount of their loan, even if they stop making payments on it. This means that even if borrowers reduce their debt, they could still owe the entire amount of their loan, making the decision even more costly.
Conclusion
While strategic default may seem like a viable option for borrowers to reduce their debt, it is important to understand all of the risks associated with this decision. Careful consideration should be taken before any borrower makes the choice to cease making payments on their loan, as the consequences could be significant and long-term.