What Does it Mean to Default on a Loan?

Person with calculator and book learning about their default on a loan

Missing a loan payment is never a good thing. When that happens, your lender can take specific actions that could damage your credit and have long-term implications for your finances.

That said, falling behind on payments doesn’t automatically mean financial ruin. If you’re struggling to make payments, there are ways to work with your lender to prevent significant damage to your credit.

To help you understand your options, let’s take a deeper look at what happens when you default on a loan — and how to protect yourself financially.

What Does It Mean to Default On A Loan?

When you take out a loan — whether it’s a student loan, credit card, mortgage, or any other type of debt — you commit to repay it on a specific schedule. This may be a fixed payment to pay off your balance within a set time frame, or it might be a minimum amount you must pay each month to stay on good terms with your lender. Whatever the terms are, if you violate them, you risk defaulting on your loan.

What Happens if You Default on a Loan?

The first thing that happens when you’re in default is that your credit will take a major hit. Your lender will report late payments and default to one or all of the three major credit bureaus. This can significantly lower your credit score, making it much more difficult for you to borrow money in the future. Defaults remain on your credit history for seven years, so they can affect your borrowing capacity for a long time.

The consequences of default can be much more serious than that, though. A creditor may also send your loan to a collection agency, which further damages your credit. The creditor or collection agency can also take additional steps to collect the debt, including taking you to court.

Depending on the type of loan and the laws in your state, a lender or debt collector may be able to seize some of your property or go after other financial assets in an attempt to recoup the debt. If you have a secured loan such as a mortgage, for instance, your lender can seize your house and put it into foreclosure. In the case of an unsecured loan, such as student loan debt, lenders may be able to garnish your wages (take a cut of your paychecks).

How to Prevent Defaulting on a Loan

These financial consequences may sound scary, and they are serious. The good news, though, is that this doesn’t happen overnight. There are steps you can take to avoid some or all of these outcomes.

Plan Well and Understand the Loan Terms

The best way to avoid loan default is by planning well from the start. When you apply for a loan, do some budgeting work to establish your payment limit so you don’t take out more than you can afford. Compare loan options and rates to get the credit you need at an affordable rate. And read the loan terms carefully so you know when payments are due, how much you must pay, and what will happen if you fall behind.

Get Organized and Automate Payments

Sometimes, people fall behind on loan payments due to simple disorganization. Life gets busy, you didn’t schedule payments, and before you know it, you’ve missed a couple. Make sure the payment schedule is on your calendar and your account has sufficient funds each month. If you can automate the process with your bank or lender, that’s even better.

Cut Back on Nonessentials in Your Budget

When you’re in danger of missing loan payments, the first thing to do is look at your budget and find areas where you can cut back. The costs of default are much higher than the costs of cutting cable or trimming back on other nonessentials.

How to Get Loans Out of Default?

Sometimes, there’s no way around missing your loan payments. You may lose your job or get hit with a medical emergency that throws your finances into disarray. If you’re facing financial hardship, the worst thing you can do is keep your lender in the dark. The further you fall behind on payments without any communication, the sooner your lender will assume you’re not planning to pay off your loan.

As soon as you think you may be unable to make a payment, reach out to your lender to discuss options. For instance, some student loans allow consolidation or forbearance options to delay repayment. If that’s not an option, most lenders will help you set up a payment plan that fits your circumstances.

Your options will vary by lender, but the point is the same: Don’t wait to communicate. It’s much easier to work out an arrangement before you’re officially in default than if you wait.

If you’ve already defaulted on a loan, you’re not out of financial options. Reach out today to learn more about how Integra can help.

FAQs About Loan Defaults

Is it a crime to default on a loan?

Although you can’t be arrested simply for defaulting on a loan, you can still face legal consequences. Creditors and debt collectors can take you to court to enforce the terms of a loan agreement, and this could lead to court-ordered fines or the surrender of assets. If you don’t follow court orders, you may risk arrest.

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