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    Home » What Is a Loan Default?
    What Really Happens if You Default on a Loan?
    All About Loans
    FinTopiAuthorBy FinTopiAuthorAugust 27, 2022Updated:June 14, 2023No Comments10 Mins Read

    What Is a Loan Default?

    If you ever took out a loan or you currently have one, you have then heard about loan default. What actually does it mean to default on a loan? In this article, we will explain in debt the meaning of loan default and what happens with defaulted loans, and how to avoid it.

    When talking about loan default definition, it’s very simple. This can happen if a borrower doesn’t make any of their payments on the loan for 30 days or more, which then can result in legal action taken by the lender to collect on the debt. Note that even if you have a good credit history, the lender cans still go after you if you default on a loan, so make sure you are on time with your payments. Why this happens is because lenders are allowed to seize your assets if you fail to repay back the loan. In other words, they can go for your house, a car, or any other assets you have.

    With all of this said, remember that defaulting on a loan doesn’t automatically ruin your credit rating. However, it will have an impact on it, and it will lower your score significantly, and it can make it harder for you to get approved for loans in the future.

    Table of Contents

    • What Really Happens if You Default on a Loan?
    • Default on a mortgage loan
    • Default on an auto loan
    • Default on a personal loan
    • Default on a credit card
    • Loan Default vs. Delinquency: What’s the Difference?
    • What Impact Does a Defaulted Loan Have on Credit?
    • What to Do If You Go Into Loan Default
    • How to Prevent Loan Default
    • Final Thoughts

    What Really Happens if You Default on a Loan?

    Now that we covered what loan default is, let’s take a look at what happens if you don’t pay your loan back. The first thing, as we mentioned above, the lender can take legal action against you and seize all of your assets to collect their debt. There are many things that can be included in this, like filing for bankruptcy, garnishing your wages, seizing your assets, and taking other legal action. That’s why it’s important to know what will happen if you do default on a loan, so make sure you are able to repay it back.

    Default on a student loan

    If you have a student loan, defaulting on it can have major consequences. Know that the lender can take several actions against you if you fail to repay it back. Here are some of them:

    • The lender can take other money from you. If you have a federal student loan, the lender can garnish your wages or even withhold your tax refund. On the other hand, if you have private student loans, they can take you to court.
    • A credit score takes a hit. If you default on the loan, it will leave a mark on your credit report for seven years. This can make it difficult to get a new loan or even a scholarship in the future. Also, it can hurt your possibility of getting an apartment or a new cellphone plan.
    • You will owe even more money. In the end, if you default on the loan, you could end up paying high fees, which can result in owning more money than you borrowed
    • Education can be affected. Once you default on the loan, you can’t receive any federal aid to help you with school tuition.

    With all of this said, if you think you are going to default on your loan, contact your financial advisor and ask for help. There are always ways to resolve it.

    Default on a mortgage loan

    We discussed defaulting on a student loan, but what happens if you default on your mortgage? In this situation, if a homeowner misses a monthly payment on their mortgage, the lender can declare it as a loan default. The default can vary on many things, starting from mortgage agreement or type, but in the end, the lender can still seize any assets belonging to the borrower to recoup their losses.

    Here are things that can happen if you default on your mortgage:

    • You can lose your home. The lender can take your house and auction it off to cover their loss
    • Your house can go into foreclosure. If you are unable to continue paying your loan, your home goes into foreclosure.
    • You can end up in debt. In the case of mortgage default, you could end up in debt because the lender will ask you to pay fees and penalties.

    In case you are going through financial difficulties, make sure to contact your lender and inform them since there are ways how to avoid defaulting.

    Default on an auto loan

    As we mentioned before, defaulting means not making your payments on time. Like with any other loan, defaulting on an auto loan is not any different. You could end up in this situation if you don’t make your payments for 30 days or more.

    Here is what can happen if you default on a car loan:

    • Credit score can take a hit. It will leave a mark on your credit report for seven years.
    • A car can be repossessed and sold. If you are unable to get out of loan default, the lender has a right to take your car and sell it.
    • The remaining debt could be sent to collections. Your lender can sell your debt to another agency that can force you to pay it up, and if you don’t, they can sue you.

    Make sure you are staying on top of your payments if you don’t want to lose your car.

    Default on a personal loan

    If you have taken out a personal loan, know that there are some consequences if you default on it. Like with any other type of loan, the lender can seize your assets if you miss payments on your loan.

    Here is what can happen:

    • It can ruin your credit score. Defaulting on your loan will leave a mark on your credit report, and it can make it difficult to take another loan in the future or to even buy a new house.
    • Your collateral can be seized by the lender. Once you take out a personal loan, if you halt on it, the lender has a right to take your collateral to recoup their loss.
    • Harassed by debt collectors. We already mentioned that the lender could sell your debt to another agency that will haunt you for the money, and if they don’t manage to get it, they can sue you.

    If you are having money difficulties and can’t stay on top of your payments, contact your lender or a financial advisor for help.

    Default on a credit card

    Like many other people, you have a credit card, and you probably like to use it for many different things, like purchasing plane tickets or shopping. Credit cards are an amazing thing. Simply because with them, you can get cash advance anytime and anywhere. With that said, if you default on the loan, it can have a bad impact on your credit report.

    Here is what can happen:

    • Legal action. Your lender can take any form of legal action against you to collect their debt.
    • Interest rates can increase. Since you are using your card, even if you are defaulting on the loan, your interest rate payment will go up.
    • Decreased credit limit. If you default on this type of loan, a lot of lenders will look at you as a risky candidate. This also means that you will have decreased credit limit, and it can increase your credit utilization rate, which can impact your credit score.

    Now that you know what can happen with your default on the credit card loan be careful and stay on top of your payments.

    Loan Default vs. Delinquency: What’s the Difference?

    Now that we covered what can happen if you default on different types of loans, let’s discuss the difference between delinquency and default. As mentioned before, if you don’t pay your loan on time and in full, you can default on it. On the other hand, delinquency is the time period before you go into default, and it’s usually up to 30 days of not making your payments on time.

    All of this might sound confusing, but default and delinquency are actually two different things. Simply said, default is when you don’t make your payments, and delinquency is when you miss making payments on time.

    Another important thing is that loan default can have more serious consequences, like losing your home or car, while delinquency can lead to harsher penalties, like wage garnishment.

    Now that you know the difference between them, the best way to avoid both is to stay on top and monitor if you are paying on time.

    What Impact Does a Defaulted Loan Have on Credit?

    We discussed before what happens with your credit score but let’s explain it more now. If you default on your loan, your credit score takes a hit. Defaulting on the loan can lower your credit by anywhere between 20 to 50 points, depending on the issuer and the type of loan you took.

    In other words, this is going to show in your credit report for the next seven years, and it can impact your possibility of getting better loans in the future or even being able to get an apartment or a new cellphone carrier plan. It’s also important to keep in mind that a defaulted loan can lead to additional fees and penalties, such as late fees and missed payments.

    Be sure to stay on top of your payments all the time.

    What to Do If You Go Into Loan Default

    If you have a loan and you think you are going to end up defaulting on it, you need to contact your lender. Once you do that, you can try and negotiate with the lender about a new repayment plan.

    If that fails, the best thing you can do is to hire a bankruptcy lawyer and declare bankruptcy. This way, you could get loan forgiveness. Either way, don’t do anything by yourself and ask for help immediately.

    How to Prevent Loan Default

    We will give you some advice and options on how you can prevent defaulting on the loan.

    Here is the list of them:

    • Plan before taking out any loan. Make a plan for how much you need to borrow and how you are going to pay it back.
    • Understand the terms and conditions. Once you decide what type of loan you are going to get, make sure you fully understand its terms and conditions.
    • Monitor your financial status. It’s important to monitor your bank statements, credit score reports, and other financial documents. This way, if any change happens, you will be able to influence it.
    • Make monthly payments on time. This is the most crucial thing to remember and do on time. Make a schedule of your payments and put an alert when it’s time to pay your loan.

    These are all key things to follow if you don’t want to end up defaulting on your loan.

    Final Thoughts

    In this article, we discussed loan default, what it means and what can happen if you default on your loan. There are many consequences that can result if you default on a loan, so make sure you don’t end up in that situation.

    We gave you some advice on how you can avoid that, but if you do end up defaulting on the loan, don’t lose hope since there are ways you can get out of it.

    Always do your diligence and research in this kind of situation and contact your financial advisor for help.

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    FinTopiAuthor
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    The FinTopiAuthor, who prefers to remain anonymous for now due to privacy reasons, has a bachelor’s degree in finance and over 10 years of experience in financial planning and bank loans. For the last 3 years, they’ve been working as a freelance copywriter in the niche of financial products, investing, and money lending, with the special attention to pros and cons of different loan types. Besides an interest in financial topics, they’re keen on traveling and various adventures.

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    Table of Contents

    Table of Contents

    • What Really Happens if You Default on a Loan?
    • Default on a mortgage loan
    • Default on an auto loan
    • Default on a personal loan
    • Default on a credit card
    • Loan Default vs. Delinquency: What’s the Difference?
    • What Impact Does a Defaulted Loan Have on Credit?
    • What to Do If You Go Into Loan Default
    • How to Prevent Loan Default
    • Final Thoughts

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