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Defaulting on a loan happens when repayments aren’t made for a certain period of time. When a loan defaults, it is sent to a debt collection agency whose job is to contact the borrower and receive the unpaid funds. Defaulting will drastically reduce your credit score, impact your ability to receive future credit, and can lead to the seizure of personal property. If you can’t make payments on time, it’s important to contact your lender or loan servicer to discuss restructuring your loan terms.
Loan Default Explained
Loan default occurs when a borrower fails to pay back a debt according to the initial arrangement. In the case of most consumer loans, this means that successive payments have been missed over the course of weeks or months. Fortunately, lenders and loan servicers usually allow a grace period before penalizing the borrower after missing one payment. The period between missing a loan payment and having the loan default is known as delinquency. The delinquency period gives the debtor time to avoid default by contacting their loan servicer or making up missed payments.
| Student Loan | 270 days | 90 days to make a payment |
| Mortgage | 30 days | 15 days to make a payment |
| Credit Card | 180 days | 1 missed payment allowed before penalty |
| Auto Loan | 1 to 30 days | Varies widely |
The consequences of defaulting on a loan of any type are severe and should be avoided at all costs. If you miss a payment or your loan is in delinquency for a few months, the best thing to do is to contact the company who manages your loan. Often times, loan servicers will work with debtors to create a payment plan that works for both parties. Otherwise, leaving a loan in delinquency and allowing it to default can, in the worst cases, lead to seizure of assets or wages.
How Loan Default Works
Defaulting on a loan will cause a substantial and lasting drop in the debtor’s credit score, as well as extremely high interest rates on any future loan. For loans secured with collateral , defaulting will likely result in the pledged asset being seized by the bank. The most popular types of consumer loans that are backed by collateral are mortgages, auto loans and secured personal loans. For unsecured debts like credit cards and student loans, the consequences of default vary in severity according to the type of loan. In the most extreme cases, debt collection agencies can garnish wages to pay back the outstanding debt.
| Student Loan | Wage garnishment |
| Mortgage | quick payday loan MichiganHome foreclosure |
| Credit Card | Possible lawsuit and wage garnishment |
| Auto Loan | Car repossession |
| Secured Personal or Business Loan | Asset seizure |
| Unsecured Personal or Business Loan | Lawsuit and revenue or wage garnishment |
Student Loans
For federal student loans, the first consequence of default is that “acceleration” kicks in, meaning that the entire loan balance is due immediately. If this balance doesn’t get paid off, the government can then withhold tax refunds or any federal benefits that the borrower receives. Debt collectors can also sue borrowers to win the right to seize their wages-and after such a trial, debtors are often charged with the collector’s court fees.
As with other debt obligations, defaulting on a student loan will send a borrower’s credit score plummeting, from which it can take years to recover. Unlike other loans, student loan defaults stay on a borrower’s record for life, even if bankruptcy is filed. Additionally, borrowers who default become ineligible to take out any more federal student aid or to apply for loan deferment or forbearance, which can help struggling debtors.
