What Does It Mean To Default On A Loan?

If you’re borrowing a loan, make sure to make timely payments and NEVER default on a loan.

People require loans for a lot of reasons; they could either be specific like Student Loans or mortgage loans, or a personal loan to pay off any prior debts or wedding expenses. Whatever the reason, you would require a loan amount from any lender willing to give you.

When you request for a loan, the lender will agree to the principal amount along with an agreed upon interest rate. You will have to pay back the whole amount including the interest rate during the time due. And if you’re unable to pay the loan, it means you’re defaulting on it.

Let’s get into details of what it means to default on a loan and what happens after it.

What does it mean to Default on a Debt?

If you’re due on a loan to pay on a particular date, you have to pay the amount due. And if you don’t, you’re likely to default on it. In simple words, defaulting on a loan means you’ve not been paying for a while.

There are A LOT of consequences for a borrower who is not able to pay their loan on time, and in turn defaults on it. Here is what happens.

Loan Default Consequences

Late Payments on Credit Report

It is important for a person to be prompt in paying back whatever amount is due each month, because a late payment stays for seven years on a credit report- and that is a LONG time. Consider this late payment factor as a major stain on your credit report (or your reputation).

These seven years mean that for a long time lenders will consider you as someone who is irresponsible in paying back what they owe. So for seven whole years you will have the hardest time finding loans, or even if you do, they will be on a very high interest rate.

Wage Deduction

Not paying off your student loans will have a drastic effect on your credit scores and will lower it down by a major bracket. Having a low credit score will lead you to complications when getting a mortgage or getting a car on lease.

If your student loan goes on default, the government can deduct 15% from your wages or take your tax refund to compensate for your loan.

In case of a default on a parent plus loan, you will have to face administrative wage garnishment, social security benefit payment offset and a tax refund offset. All of these will unknowingly invite so many consequences for you.

If your loan hits default, there is still a chance for you to bring it back by entering into loan rehabilitation. This is a process where you agree to pay 9-monthly payments in a repayment program. After you’re done paying for the 9th month, you will be pulled out of default and transferred to a new loan servicer. You can then customize another payment plan that suits you, and then make sure you stick with it too.

Car Seizure

At the point when an auto loan defaults, the moneylender or vehicle vendor is generally ready to seize the vehicle to pay for the remarkable obligation. Nonetheless, seizure is a final hotel move for most auto banks. Since the estimation of a vehicle deteriorates overtime, almost certainly, the current estimation of a repossessed vehicle isn’t sufficient to cover the exceptional equilibrium of a defaulted advance.

Repossessed vehicles likewise must be exchanged for the moneylender to get any money- and all things considered, loan specialists like to get cash from their borrower as opposed to holding onto security. So more often than not, they’re willing to work with borrowers to rebuild the particulars of an auto loan.

What does it mean to default on a Mortgage?

Mortgages are secured with the purchased home as collateral, meaning that the home can be seized if the loan isn’t paid back according to the initial agreement. For most homeowners, this means that defaulting on a mortgage will lead to foreclosure.

Like with other loans, it’s important to communicate with your loan servicer if you think you can’t make your mortgage payment. If you’ve made payments on time in the past and can prove your current financial distress, you may be able to negotiate for a restructured loan agreement.

Loan Type What Can Happen After Default?
Student Loan Wage garnishment
Mortgage Home 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

Debt Collectors

When you default on a loan, your lender contacts debt collectors who pester you for the payment. Debt collectors are carefully managed at both the government and state level. They’re not permitted to simply do anything they like to pressure you into paying your debts. The Fair Debt Collection Practices Act (FDCPA) contains a rundown of decisions that debt collectors must follow at whatever point they endeavor to gather a defaulted debt.

One of the most well-known activities that a debt collector may take when you neglect to pay is to report your record to the three significant credit departments. At the point when a collection account is added to your credit reports, the outcomes can be serious. Collection records can stay on your credit reports for as long as seven years from the date of default of the first record.

And this will surely bring down your credit scores. At the point when your credit is harmed by collection accounts, this can likewise cause many inconvenient results, for example,

  • Denial of loan and credit card applications
  • Higher interest rates if you are approved for financing
  • Difficulty getting hired if an employer performs a credit check
  • Higher insurance premiums

A Debt Collector can Sue you

The absolute most unnerving things that a debt collector can do is file a lawsuit against you for not being able to pay back the amount that is due.

In the event that the debt collector sues you and wins the claim, or you neglect to react hence losing of course, the court will enter a judgment against you. Contingent on the state where you dwell, a judgment may likewise open up the following possibilities:

  • Pay garnishment
  • Tax refund garnishment
  • Bank account levies

This is what happens if you don’t pay back a loan.

Improving Credit Score after Default

Now that you’ve defaulted on the loan, it is important for you to improve your credit score to be able to secure loans in the future.

This is how you can do so:

The situation is clear: even a single late payment will affect your credit score. So how do you recover from a bad credit score? There are ways to improve your credit score.

Even if you’re not a high-risk borrower on your own fault, there are chances that you default on the loan because of higher interest rates. Here’s how you can avoid getting to that stage of default:

  • Budget your income to include the potential loan payment.
  • Check your credit score and fix errors in your credit history.
  • Make timely payments each month to improve your credit rating.
  • Shop around for alternative lenders.
  • Consider asking someone with strong credit and income to cosign on the loan.
  • Set a reminder at least 3-4 days prior to the due date so that you don’t forget paying, and if you’re short of money, you have time to ask from your friends or family.

The best way to improve your credit scores after you default is doing all of these steps to make sure you never miss a payment next time.

How to get out of Paying Debt Collectors?

There is no way you can get out of paying debt collectors, unless they suddenly become generous and you become lucky and they forgive their debt to you. While that is rarely going to happen to anyone, there are ways to deal with debt collectors when you can’t pay:

  1. Firstly, don’t ignore them. They will keep pestering unless you pay them the amount, and if you’re just ghosting them, it will make matters far worse. This will also negatively affect your credit scores and debt history.
  2. Get everything in writing– debt collectors must have everything in writing that you’re asking for the debt back and how much you owe at the end of the term including interest.
  3. Try settling or negotiating with the creditor by asking them more time, proposing a doable payment plan and asking them to lower down the interest. This may or may not work, but you could try your luck here.
  4. Know your rights! Debt collectors can’t go out of their way to take out debt from you- they can’t harass you or bully you into paying, they must not call you at odd hours (they must only contact you from 8am to 9pm).
  5. Challenge the debt- You have a right to dispute the debt. If you challenge the debt within 30 days of first contact, the collector cannot ask for payment until the dispute is settled. After 30 days you can still challenge the debt, but the collector can seek payment while the dispute is being investigated.


To default on a loan means to stop paying the amount due, and this is rather a common practice among borrowers. A lot of people forget to pay when the time is due, or have a hard time arranging for payments due to a lot of other expenses.

There are several consequences for a person who defaults on a loan, the biggest one being a drastic fall on their credit score. The credit score determines the creditworthiness of the borrower, and a low credit score will only make it harder- or sometimes even impossible- for you to get another loan.

Make sure you NEVER default on a loan, and if you feel like you’re on the verge of it, talk to your lender beforehand. Ask for a grace period during which you are surely able to pay back before the loan is defaulted.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.

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