What Happens if I Default on a Loan?

Defaulting on a loan can have serious consequences. Learn how to avoid defaulting and what steps to take if it happens.

Updated: September 20, 2023

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When you take out a loan, you intend to be able to pay it back. However, sometimes unexpected financial situations can make it challenging to make your payments. 

Defaulting on a loan happens when you miss your monthly payments for a specific amount of time. Once your loan is in default, you can experience consequences, including damage to your credit score, collection efforts, legal actions, and possibly losing assets secured by the loan. 

What Happens When I Start Missing Payments?

Delinquency is the first step towards defaulting on your loan. If you miss a single loan payment or make a late payment, you will be delinquent on your loan. 

At this stage, your loan payment is past due. Lenders typically have a grace period that allows late payments without severe consequences. However, you may experience late fees. 

Delinquency can lead to default, but it’s important to note that it is a temporary and reversible situation. You can recover from delinquency by making your missed payment(s) and getting back on track with your loan obligation. 

If you become delinquent on your loan or struggle to make payments, immediately contact your lender. Communicating and taking proactive steps can help stop delinquency from escalating into default. 

When you miss consecutive payments for a specific period of time as specified in your loan agreement, you default on your loans. Default is the next step after delinquency and represents a more severe failure to make payments and pay back your loan. It can result in negative consequences, including legal action. 

What Does it Mean to Default on a Loan?

Defaulting on your loan will have different consequences and courses of action based on the type of loan. Different loan types have different time periods for default. Remember that the exact time period will differ depending on your lender and loan agreement.

Credit Cards 

Credit cards will usually default after several months of delinquency. Exact timelines for default may vary, so check with your lender.. Expected consequences include increased interest rates and penalty fees. 

If your credit card defaults, you could experience aggressive collection efforts from your lender or a debt collection agency. Your lender could also pursue legal action to recover the outstanding debt and possibly secure wage garnishment

Personal Loans

Personal loans will default at different times depending on your lender and loan agreement. Typically, it will be after several weeks or months, but check with your lender for the exact timeline.  Depending on the loan type, personal loans could result in wage garnishment or seizure of your collateral asset if you have a secured loan. 

Mortgage

The time period for defaulting on a mortgage will vary by the lender and state. For many borrowers, defaulting on a mortgage will lead to foreclosure. If you struggle to make your mortgage payments, consider refinancing your mortgage. 

Student Loans

Student loans will typically default after 270 days. This type of loan has a long delinquency period, allowing you more time to sort out your financial situation. 

The first consequence of student loan default can be acceleration, meaning your outstanding balance is due immediately. The federal government can also withhold federal benefits and tax refunds until you repay your debt. Defaulting on student loans can also result in wage garnishment. 

Auto Loans

Auto loans will typically default after several weeks or months. For an exact timeline, check with your lender. If you default on your auto loan, your lender may repossess your vehicle. If your car is repossessed, you may still owe your lender due to your vehicle depreciating. 

Consequences

Regardless of the type of loan you are defaulting on, certain consequences may apply in every situation: 

  • Damage to your credit score: default will be reported to the credit bureaus, causing your credit score to fall. A low credit score may make qualifying for future credit and favorable terms difficult. 

  • Increased interest rates and fees: late fees will add to your debt balance, and you could experience increased interest rates when you default. Increased rates and added fees will make it even harder to pay off. 

  • A default will stay on your credit report for seven years: your credit score can improve over time, but the default will stay on your report for seven years.

  • You may have to work with a collection agency: lenders may involve collection agencies to recover the outstanding debt. They may frequently contact you until you pay off your debt. 

  • Potential legal action: legal action can result in wage garnishment or seizure of your collateral asset, depending on loan type. 

How to Avoid Going Into Default

If your loan is not already in default, you can take steps to avoid it. Since default has some significant consequences, try your best to prevent it. Here are some options that may work for you based on your financial situation and loan type: 

  1. Deferment or Forbearance: One option to avoid default is seeking deferment or forbearance. Both are ways to provide temporary relief from your payments and require specific eligibility criteria and approval from your lender. Contact your lender to learn if this may be an option for you. 

  2. Repayment Plans (For Federal Student Loans): Changing your payment plan may be a viable option for federal student loans to make your payments more manageable. Income-driven repayment plans base your monthly payments on your income and family size. An income-driven repayment plan may be a good option if your current payments are not affordable for your income. 

  3. Refinance or Consolidate (For Student Loans): For private student loans, refinancing1 can lower your monthly payments. For federal student loans, consider consolidating. Although this may result in paying more in interest over the life of your loan, it may help make your monthly payments more manageable. 

  4. Contact Your Lender: Options to avoid default will vary depending on your lender and loan type. If you struggle to make payments, do not hesitate to contact your lender. Explain your financial situation and work with your lender to come up with a solution. 

What To Do if You’re in Default

If you’re in default, contact your lender as soon as possible. Do not avoid communications from your lender or collection agencies. 

There are options out there if you’re struggling to make payments. Apply for a debt consolidation loan2 or balance transfer credit card today. 

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

2 Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner. All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial. Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions. 

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans.

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