When you take out a mortgage, personal loan, or auto refinance loan, you promise to repay it. But one day, the unexpected happens, and you think you may miss a payment or two. That could be a bright example of how learners can default on student loans. Moreover, you can be a responsible borrower who sticks to loan requirements yet still can’t avoid loan default.
Last year’s events are proof of emergency or unexpected things no one is immune to avoiding. Moreover, job losses or wage garnishment could only renew the challenge.
So, what does defaulting on a loan mean? The result of a missed payment is a delinquent loan. Yet, if you stop paying it for a certain period of time, you will default.
Borrowers who default on student loans face a whole new chain of events. And negative consequences on your credit score are just the beginning. Thus, without further ado, let’s learn what it means to default on a loan mean for a borrower.
What Happens if You Default on a Loan?
There are different types of loans and triggers that can lead to a default, varying by the loan type and lender.
As a rule, one missed payment is not enough for a debt collection agency to start the recovery process. Just because the procedure of establishing a repayment plan for debt collection is by far an expensive process for the lender, they’ll usually give borrowers a chance and wait a few months until they pay out student loans.
But again, that could vary by the debt collector and the terms of your mortgage payment terms.
So, before knowing what happens when you default on a loan, define your loan type:
- If you’re responsible for a student loan, then you have 270 days to repay it. But the deadline is relevant for federal student loans. For private student loans, you have 120 days.
- To prevent default on an auto loan, apply for a car finance payment holiday. Thus, you’ll get up to six months in total to start your repayments again. But make sure you understand what happens when it comes to an end.
- As a credit card holder, you have 180 days to term normal collections. Bear in mind this time frame may vary by collection agencies. During this period, you’ll receive letters, phone calls, or other similar methods requesting you to pay what you owe on your credit card. Once the term is over, you default on a credit card, and your student loan is considered a bad debt. As a result, it negatively affects your credit report.
- If you’ve taken out a mortgage loan, you have a set of rules that you promise to uphold. And if you miss a few payments, you run the risk of stepping into a default. Generally, your mortgage can be considered in default once your payment is more than 30 days late. Sure, your mortgage lender might have a shorter time frame. So, if you want to keep your credit score intact and be able to borrow in the future, discuss the situation with your lender.
- Personal loan default happens when you stop making your monthly payments. This could be something from 30 to 90 days. So, if you’re in danger of defaulting on your loan, take the first step forward. Otherwise, you risk damaging your credit score, putting your cosigner on the hook, getting into a situation with a wage garnishment, and the like.
Now, what happens if you default on a payday loan? Borrowers with payday loans in default are playing a game of chicken that they’re more likely to lose. They end up paying $9 billion in fees on those student loans, or $750 per person.
Just because payday loans are one of the most expensive ones you can borrow, payday loan default consequences can make your financial situation even worse. If you default on the payday loan within a short amount of time, usually 14 days, extra fees start adding up to your student loan.
How Does a Defaulted Loan Affect Credit?
Many customers have no clue that defaults can greatly reduce their credit scores. It also negatively affects your eligibility to get personal or federal student loans in the future. In some cases, the situation may escalate to the point that the debt collector will be required to confiscate your property.
If you struggle to make monthly payments according to the loan terms, apply to the credit bureaus or your loan servicer to negotiate a possible solution. For instance, a lender may offer you to create a manageable repayment plan.
Keep in mind that reimbursement of student loan default won’t improve or impact your credit report. Besides, your score will restore as the student loan gets older. Last but not least, mortgage loan collectors won’t even grant you funds until all your defaults are cleared.
Loan Default vs. Delinquency: Let’s Consider What The Difference
When it comes to the consequences, loan default and delinquency do not carry the same weight. When borrowers are delinquent, they aren’t making their monthly payment on student loans on time. As a result, you’re charged a late payment fee in addition to your missed payment.
Default, in turn, happens when learners fail to catch up on the monthly payment of their student loans. Thus, aside from negative marks on your credit report, your score goes down even further.
Why Can Loan Default Happen?
Life is not a fairy tale, and even the best of us can slip. In times when unexpected circumstances hit you, paying your debt obligations and covering gaps on your credit cards becomes a challenge.
This can happen because of job loss, illness, or disabilities, the choice is wide, in fact. Yet, not every loan holder intentionally refuses to repay their debt.
Whatever your reason, defaulting on a loan of any type should be avoided at all costs. The consequences you’ll face would be a real challenge and would not add extra points to your karma.
Loan Default Consequences
When you’ve been approved for a student loan, for example, you have the funds available to close your financial gap. As time goes by, you might find it challenging to make student loan payments on time. As a result, your debt can be considered delinquent. But what does defaulting on a loan mean in such a case?
If you have a balance outstanding for an extended period, then your personal loan moves from delinquency into default state. From that moment, you can receive a notice in writing specifying that you have broken the terms of your loan agreement.
You’ll receive such letters and phone calls until the moment your debt collectors are convinced they won’t receive the money back. Then, the lender charges off your mortgage, which means that they remove your business loan or car loan from their balance sheet.
This, however, hardly means that you’re not accountable for paying your student loan as the option of loan forgiveness is impossible. To add, this will ruin your credit score and can be on your credit check for seven years. In case you’ll pay down your debt, it still is on your credit reports. Yet, it can reduce the impact on your credit score.
What happens when you default on a payday loan by closing your bank account?
Bad idea. And that’s why. You gave the collection agency a promise to fulfill your obligations by getting money from your account. If you think that the closed account will stop them from attempting to collect your money, you’re wrong. As a result, you’ll end up accumulating extra fees from the bank every time the payday lender tries to withdraw the money from your account.
What about opening an account in another bank? Generally, most banks don’t practice this method until you still owe money to another bank. The only way is to close all of your accounts to block debt collectors from automatic credit cards payments.
And it doesn’t stop there. There’s always a chance that a collection agency will take you to court. Getting approved for an advance in the future can be a tough gig, as court costs more than a regular holder can afford. Finally, a court order for an arrest could also be a part of the default process.
How to Prevent Defaulted Loans?
As the saying goes, prevention is better than cure. Financial health is no exception, too. Thus, if you find that you are having difficulty making monthly payments, contact your loan servicer immediately.
You’ll be able to request a deferment or a forbearance. It doesn’t matter whether you’ve applied for personal loans or auto loans. You can also negotiate lower interest rates and tax refunds.
There is also a possibility to change your repayment plan. All in all, this is your best chance to get more breathing room to get back on track and help maintain your score.
If you’ve applied for a student loan and default occurs, you have more flexible options for best debt relief. Prior to obtaining your loan balance, you need to submit a Free Application for Federal Student Aid (FAFSA).
Based on the result of your admission, a career school or your college will send you a federal student aid offer. However, once learners apply for personal loans like Lendly, they have to be ready for credit checks and the consequences of a missed payment.
If you didn’t mean to default but got into a situation, you should be willing to work to repay the entire loan. To be organized and avoid student loan default, keep track of your credit cards and advertiser disclosure, or create a table of contents. Make sure you have funds to cover loan payment every month.
How Defaulting on a Loan Can Affect Your Credit?
Negatively. Your late debt payments are especially important to the credit bureaus.
Sure, it depends on how high your score is, what interest rates you agree to, and how long you’re past due.
The FICO study suggests that being late for a business loan for two months can drop clients’ credit scores by up to 130 points.
So, better if you get in touch with your loan servicer before your next credit card payment is due.
What Should You Do If You’ve Defaulted on a Loan?
Now that you know what does defaulting on a loan mean, learn what steps to take to get your credit back on track.
- The first thing to do is never ignore your auto loan. The day you apply for it, you think it’s the most difficult time period you could only have. Yet, things go south without warning. As a result, your poor financial health can go even worse. So, before you apply, read carefully your auto loan agreement to know the consequences if you go into default one day.
- If you have already defaulted, it’s important to pay your mortgage default past-due amount. This doesn’t mean your account will recover, yet you won’t be accumulating penalty collection fees.
- Opt for deferment or forbearance to restructure your payment plan and stay current. There are options, pick the best one that works for you.
- Finally, take care of your credit score. Monitor your credit cards and loan payments regularly to understand your standing. Bankruptcy is a last resort and will affect your payment history and credit rating for years.
How to Avoid a Loan Default?
The first thing is to be proactive and contact your debt collection department. If you’re struggling to cover the loan amount within the indicated loan term or simply want to cut costs, talk to your lender. Otherwise, you could face more serious consequences than a damaged score.
For instance, you may receive mandatory loan consolidation, get banned by credit card companies, or be charged by the court. In these cases, it is better to ask the help and find out how often do debt collectors take you to court.
Some debt collectors can offer special programs for borrowers experiencing financial troubles with different loan types. You have several options. Learn what happens when you default on auto loans or student loans.
Then, you’ll find out that you can turn to the U.S department of education and ask for federal student aid. A lender may soften the requirements of mortgage payment and help you to manage the situation.
Sure, consolidation of your debt doesn’t reduce the amount you owe, yet it could be a good way to get back on track. Also, you can opt for a lower interest rate or optimized loan payments.