This is What Happens if You Default on a Loan

Written By Mary Beth Eastman
Last updated December 11, 2020

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July 12, 2019

Simple. Thrifty. Living.

If you have taken out or are considering taking out a loan, you may be wondering what would happen if you were to run into difficulties making payments. While we love to recommend top online loan sites, we want you to know whether you can afford to borrow first.  In this article, we’ll take a look into what happens if you default on a loan, the impact to your credit score and what you can do to prevent it from happening.

When you take out a loan, you enter an agreement with the lender that you will pay back the loan amount plus interest within an agreed period. A default can occur when you miss one payment or several payments. The timeline will depend on state or federal laws and the terms of your loan.

A report released by the U.S. Department of Education revealed that 11.5% of students making federal student loan payments in 2013 had defaulted on their loan within two years. According to the Federal Reserve Bank of New York, 7 million Americans are behind by at least three months on their car loan repayments. That’s a rise of almost a million since 2009.

Some people might default on a loan knowingly when they are unwilling or unable to make payments on time or in full. Others may unintentionally default on a loan because they didn’t realize they owed money to a lender. For example, if a loan has been taken out fraudulently in your name, the first you may know about it is when you receive a default notice in the post or try to get turned down for credit. You can protect yourself against surprises like that by monitoring your credit report and protecting against identity theft. We reviewed the top identity theft protection companies so you can stop fraudulent people from abusing your credit history.

Sometimes, people don’t receive notices of default or late-payment notices because they have changed their contact information or moved house recently. It’s important to notify your lender if your mailing address has changed.

Depending on the loan type and your creditor, your account could slip into default after just one missed payment. The consequences also depend on the product and the lender. In most cases, a defaulted loan is passed to the lender’s collections department to deal with, or in some cases, passed to a third-party debt collections agency. Defaulted loans can hurt your credit score significantly.

Late payments, defaults and collection accounts can all stay on your credit report for up to 10 years. Even a single late payment can damage your credit score.

If you default on one loan, it could mean you are unable to obtain certain types of similar loans. For example, if you default on a federal student loan, you may not be able to take out further federal student loans unless you can get the first loan out of the default zone.

It may be worth it to refinance your loan so that you can afford the monthly payments. These are the top student loan refinancing companies.

If you are struggling to make your payments on time, the worst thing you can do is stick your head in the sand. Speak to your lender. Be honest. Most lenders are understanding when their customers run into financial difficulties and may even be able to temporarily halt payments without any penalties. You may also be able to negotiate with your lender to reduce your monthly payments without affecting your credit score.

Don’t consider taking out another loan or line of credit to help you to make payments on your original loan. This can only get you further into debt.

A default can negatively impact your credit, and prevent you from obtaining loans in the future. Always prioritize your spending so that your bills are paid first. Here’s some help on how to budget. If you do run into problems, face them head-on and work with your lender to find the best solution.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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