What Does it Mean to Default on a Loan?

When you take out a loan, you agree to pay back the money you borrowed plus interest (the cost of borrowing) over time. Sometimes, life throws curveballs — like job loss, illness or unexpected expenses — that could make it difficult to keep up with payments. After several missed payments, you may default on the loan, which could make it harder to borrow in the future and cause other financial challenges down the road.

There are some steps you can take to avoid defaulting on a loan and other actions to take if you do.

Let’s walk through what a loan default is, how it can affect you and what you can do if it occurs.

What is a loan default?

A loan default occurs when you fail to repay your loan according to the terms outlined in your agreement with the lender. This means missing scheduled payments on both the principal (the original amount borrowed) and the interest, which is the cost of borrowing.

When you sign a loan agreement, you commit to a specific repayment schedule. If you miss enough payments, your loan may be considered in default, which can lead to serious financial consequences.

What happens if you default on a loan?

If you're struggling to make payments and at risk of default, many lenders are open to working with you to find a manageable solution. However, if you are unable to reach an agreement with your lender and your loan goes into default, it can trigger a range of consequences, including:

Late fees and interest.

Falling behind on loan payments can lead to late fees or missed payment penalties, which quickly increase the total amount you owe. Even if you stop making payments, interest continues to accrue, making the loan more expensive over time. Most lenders begin applying late fees well before the loan is officially considered in default.

Damage to credit score

Your payment history plays a major role in determining your credit score. In most cases, lenders report missed payments to the three major credit bureaus (Equifax, Experian and TransUnion), which can lower your credit score and impact your ability to borrow in the future. When you default on a loan, it can further damage your credit standing.¹

Consider checking your credit score often so you know where you stand.

Difficulty getting approved for future loans or credit cards

Lenders use your credit score to evaluate your creditworthiness — that is, how likely you are to repay borrowed money. If a borrower’s credit score decreases because of a loan default, it may be harder to get approved for loans or credit cards in the future, and the borrower could face higher interest rates if they are approved.

Collections

If a loan goes unpaid, lenders typically take steps to recover the funds. They may transfer the account to their internal collections team or hire a third-party debt collection agency. In more serious cases, the lender may pursue legal action to recover the outstanding balance.²

Collateral loss

A secured loan is backed by collateral, which is something valuable you own, like a car or a house. If a borrower defaults on a secured loan, the lender has the right to take possession of the collateral to recover the money owed.

How to avoid defaulting on a loan

It’s always best to try to avoid defaulting on your accounts. Here are some simple tips to help you stay on track and avoid missing payments:

• Pay on time: Keep records of all your loans, including amounts, interest rates, scheduled payments, and due dates. Making scheduled payments on time is key to avoiding late fees and protecting your credit. Consider setting up automatic payments to ensure you never miss a deadline. If you prefer to pay manually, use phone alerts or calendar reminders to stay organized.
• Build your loan payments into your budget: Treat your loan payments as a fixed expense in your budget, just like rent or utilities. By looking at your loan payments as regular expenses, you can ensure you have enough money to cover your payments each month. If you haven’t created a budget yet, now is a good time to start.
• Keep an emergency fund if possible: Even a small emergency fund may help you keep up with loan payments if you hit a rough patch.
• Communicate with your lender early: If you know you’re going to miss a payment, contact your lender as soon as possible. Many lenders, including OneMain, may be willing to offer temporary relief options like deferring payments or modifying your loan to help make payments more manageable.
• Avoid taking on more debt than you can handle: Only borrow what you need and think about how future payments will fit into your budget.

When default occurs for different loan types

Each loan type is impacted differently when default occurs:

Personal loans

A personal loan can be secured or unsecured. A secured loan is backed by collateral, while an unsecured loan is not. Typically, 90 days of missed payments will result in a borrower defaulting on a loan.³

With a secured loan, the lender can take the borrower’s collateral to recoup their costs if the borrower defaults. With an unsecured loan, the lender could send the account to a debt collector, take legal action, garnish wages, or even put a lien on the borrower’s assets. A lien is the lender’s legal claim to an asset even though it wasn’t used as collateral for the loan. If a borrower is unable to repay the missed payments or come to an agreement, the lender could take the asset to help cover what the borrower owes.⁴

Credit cards

Credit cards are a form of revolving credit, meaning you borrow money up to a limit and pay it back over time, typically with a minimum monthly payment, and then may borrow again . Missing payments could result in high fees and interest, and defaulting can negatively impact your credit history and lower your credit score, making it harder to get loans and credit cards in the future. Credit card accounts generally go into default after the borrower has not made at least the minimum payment for 180 days.⁵

If the lender isn’t paid, they or a debt collector could file a lawsuit and get a court order for repayment, which could mean wage garnishment or liens on the borrower’s property.

Auto loans

Auto lenders typically wait 30 to 90 days after a missed payment before declaring a loan in default.⁶ However, the timeline may vary based on your lender’s policies and state laws.

Since a vehicle serves as collateral for the loan, the lender has the right to repossess the vehicle if payments are not made as agreed. Once repossessed, the vehicle may be sold to help repay the loan. If the vehicle sells for less than the amount owed, you may still be responsible for paying the remaining balance.⁷

Mortgage loans

A mortgage is a secured loan used to buy a home. Defaulting on a mortgage may lead the lender to foreclose on the house, meaning the lender can take ownership of the property and sell it to recover the balance. Missing a payment for 30 days or more may lead to a mortgage loan default.⁸

Student loans

If you miss a payment on a student loan, you have some options before defaulting. You may be able to change your payment plan, get a deferment (a temporary postponement of payments for specific qualifying events), or apply for forbearance (a temporary pause or reduction in payments for eligible borrowers). If you don’t pay or adjust your payment schedule for 90 days, the loan servicer will report missed payments to the main credit bureaus.⁹ Different federal student loans have different amounts of time before a loan goes into default. However, if a borrower defaults on a loan, the lender may take several actions, including taking them to court, garnishing wages or tax refunds, or accelerating the due date so that the entire loan becomes immediately due.¹⁰

What to do before you default on a loan

If you’re worried that you’ll default on a loan, it’s important to act quickly. Here’s a checklist of things that could help:

• Get in touch with your lender: Contact your lender right away to explain the situation. The lender may be able to offer you a payment plan or other options to help you get back on track.
• Look into loan repayment programs: Some lenders offer programs that can reduce your payments or extend the repayment term. Ask about these options.
• Ask about settlement options: In some cases, the lender may agree to settle your debt for a lower amount than you owe. A settlement may help you avoid collections or wage garnishment.
• Connect with a credit counselor: A nonprofit credit counselor could help you plan to get out of debt and repair your credit.

Manage your loan with confidence

If you act early and stay proactive about managing your loans, you could avoid a loan default and stay on track with your financial goals.

If you do find yourself in a tough situation, remember there are steps you can take to get back on your feet. Don’t hesitate to ask for help — staying on top of your loan payments is key to managing them with confidence.

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Sources 1 https://www.myfico.com/credit-education/whats-in-your-credit-score

2 https://www.investopedia.com/terms/d/default2.asp
3 https://www.nerdwallet.com/article/loans/personal-loans/default-personal-loan
4 https://www.experian.com/blogs/ask-experian/what-is-a-lien/
5 https://www.bankrate.com/credit-cards/advice/credit-card-default/
6 https://www.experian.com/blogs/ask-experian/how-bad-is-it-to-default-on-a-car-loan
7,8 https://www.experian.com/blogs/ask-experian/what-does-it-mean-to-default-on-a-loan/
9 https://studentaid.gov/manage-loans/default
10 https://studentaid.gov/help-center/answers/article/what-are-consequences-of-default