What Happens When You Default on a Loan?

Defaulting on a loan is the monster every borrower fears with all the horror stories that come with loans. However, having a better understanding of what defaulting a loan is can actually help you come up with a solid plan to avoid it; at least you’ll know what you’ll be signing up for before making any commitments.

Of course, you might have gotten a loan already, and things can be getting out of hand at this point, so we made sure to mention a different situation that will help you sort things out if you can’t make your next payment. Can you get multiple payday loan? Find out about multiple payday loans here.

So, without any further ado, let’s start with explaining what defaulting on a loan is.

What Is Defaulting on a Loan?

what is defaulting on a loan

Drawing from our experience, defaulting on a loan means failing to pay back your lender as per your agreement. This means that you’ll be left with an outstanding balance, and if you don’t make the payment soon enough, you might end up with additional charges, usually referred to as a “late payment fee.” How to work out loan repayments will be important as you move forward.

The good thing is, this won’t happen as soon as you miss the payment because lenders have a grace period after the due date, during which the borrower can make their payment without getting in trouble. This period is called “delinquency.” What is personal loans? Learn all about personal loans here.

After the delinquency period, the lender can report to a debt collection agency that the borrower hasn’t made their payment, and they take it from there.

What Happens When You Default on a Loan?

what happens when you default on loans

Defaulting on a loan has some severe consequences, so it should be avoided at all costs. As mentioned above, you don’t have to deal with these consequences as long as you’re in delinquency, which can vary according to the type of loan you have.


For instance, the delinquency for student loans is usually 270 days, whereas credit card loans allow for one missed payment before a penalty is applied. To know how long you have before your loan defaults, you can refer to the terms and conditions you agreed to.

As you may already know, defaulting loans lower your credit score, which makes it less likely for lenders to approve your future loans. Learn how to get approved for a loan here. Nonetheless, that’s not the extent of it because debt collection agencies usually find ways to pay back lenders, which is never in the borrower’s best interest. Finding it difficult to get a loan? Saying to yourself, “need loans been refused everywhere“? Learn how to get a loan here.

For secured loans, the penalty is seizing assets, which means that lenders take possession of the borrower’s collateral. Learn the secured loan meaning here. Unsecured loans, on the other hand, usually end up in a lawsuit and wage garnishment, so the court will withhold a portion of your wage that will go to the lender until your debt is resolved.

What Happens When I default on a Student Loan?

As indicated by our tests, if you fail to keep up with a student loan, it accelerates, and the entire balance becomes due to immediate payment. If you still didn’t pay the outstanding balance, debt collectors can take things into court and end up seizing your wages. How long to pay off my loan? Learn more about length of loan repayment here.

Although it might seem quite bad, things rarely go this far, particularly because student loans have an extended grace period that reaches eight to nine months. However, keep in mind that if things got out of hand, it’d stay on your credit profile forever, even if you paid off the debt, so it’s best if you don’t take it for granted.

What Happens When I default on a Mortgage Loan?

Our findings show that, if you failed to pay a mortgage loan, the lender would seize it, and you’ll have to go through a foreclosure. Such a consequence is life-changing, which is why it’s always better to negotiate things with your company during delinquency. If you get enrolled in forbearance, the foreclosure will be delayed, and you’ll win over some time to try to settle things.

What Happens When I default on a Credit Card Loan?

what is defaulting on loans

Even though these loans have relatively long grace periods, if you default on a credit card loan, you’ll end up with a huge outstanding balance that’s much higher than the original amount. Begin to repair your credit with paid default loans.

Moreover, missing several payments plummets your credit score and triggers multiple late fees in addition to the high-interest rate credit cards have. Apply for a payday loan at Perfet Payday. Learn the payday loan definition here.

If worse comes to worst, the debt collection agency will sue for a wage garnishment to repay the debt. Learn how to pay your loan off faster. To avoid this, it’s better to request a personal secured loan with a low-interest rate, or even better, get a no-interest loan. Learn how does interest work on a loan here.

What Happens When I default on a Business Loan?

The consequences of defaulting on a business loan depend on whether the loan is secured or not. As for secured loan application process, things end up in seizing revenue or inventory. In case of failing to pay off an unsecured business loan, lenders usually sue in favor of the company’s earnings for repaying the loan.

What Should I Do If I Can’t Make the Next Payment?

The first thing you need to do is contact the lender because most companies offer debtors alternative payment arrangements that are more suitable for both sides. If you made your previous payments on time and you can prove you’re going through temporary financial distress, you might be able to convince the lender to shift you to a different payment plan.

Can I Get Out of a Loan Default?

Avoiding a loan default isn’t an easy task. As we were just saying, your best shot is contacting your company for negotiation or consolidating your debt to lower the interest rate.

What Should I Do If I’ve Already Defaulted on a Loan?

If you already defaulted on a loan, here are a couple of solutions that can get you out of trouble:

Pay the Outstanding Balance

defaulting credit card loan

This is the best way to avoid late payment fees and get back on track. If you can make the payment, or even part of it, contact your company before they involve a debt collection agency.

Reconstruct Your Payment Plan

Getting a deferment or a forbearance can help you save your mortgage. It entails coming to an agreement with the lender to delay foreclosure.

Loan rehabilitation programs are another way to go if you’re struggling with a student loan. You can also opt for a definition of loan consolidation that enrolls you into a different repayment plan according to your income.

Bottom Line

Whatever you do, you should never ignore your debts, or else; they’ll just pile up and become unmanageable. Try to communicate with your lender as soon as possible to have enough time to come up with the best plan and go through all the necessary paperwork. At what age can you get a loan? Are loans for 17 year old available? Learn more on this page.

About the Author

Lucy has over a decade of experience in finance. She is currently the content curator here at Perfect Payday.

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