A default occurs when you miss one or more payments in a row on a loan or credit card. Because defaulting can cause your credit score (and your overall financial health) to drop quickly, you should do your best to avoid it.
Select breaks down what happens when you default on different types of debt and what you can do to prevent it.
What happens if you default on a loan?
Which leads to a loan default
If you’re a few days late in paying your loan or credit card bill, you’ll most likely not default yet, thanks to a Many lenders and issuers give borrowers a grace period. The length of the grace period can vary depending on the type of loan and lender and is usually between 30 and 90 days.
Once the grace period has expired, your account will become insolvent. At this point, the lender may report late payments to the credit bureaus, which will result in a drop in your credit score. The longer the insolvency lasts, the greater the damage to your credit rating. What’s worse, this default will remain on your credit report for seven years (counting from the first month of consecutive defaults).
You can check your payment history by signing up for a credit monitoring service. For example, *Experian’s free credit monitoring alerts you to missed payments and shows how long your accounts have been delinquent.
Experian Boostâ„¢
On Experian’s secure website
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Cost
-
Average increase in credit score
13 points, although the results vary
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Credit report affected
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Credit rating model used
Results vary. Further information can be found on the website.
If you continue to miss payments, you risk turning your insolvency into a default. In this case, the lender may attempt to collect the missed payments or sell the debt to a debt collection agency. A collection on your credit score can deal another blow to your credit score and remain on your reports for seven years. And if you have secured debt, you may lose the collateral (e.g. your car for a car loan or your house for a mortgage).
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This is how a loan type standard works
Defaulting on your debt is never good news, but what exactly you can expect next depends on the type of loan.
Credit cards
If you haven’t made at least the minimum payment on a credit card for six months, the issuer typically gives up waiting and your account goes into default. If you a. have fallen behind schedule If you use a secured credit card, the deposit you pay will be applied toward the debt. When it comes to unsecured credit card debt, the issuer will likely refer it to collection agencies.
A debt collection agency will attempt to settle the debt with you. If they are unsuccessful, they may sue, which could result in a wage garnishment or a lien on your home or other assets.
mortgage
Failure to pay your mortgage is one of the easiest ways to lose your home.
A mortgage lender may consider your loan in default after just 30 days of default. And after 120 days, they can begin the foreclosure process to seize your home.
A foreclosure not only results in the loss of your home, but it also destroys your credit score and stays on your reports for seven years.
Private loan
If you have been delinquent for at least 30 days, your personal loan may be in default.
Most personal loans are unsecured, so the process is similar to defaulting on an (unsecured) credit card. The lender will likely sell your debt to a debt collector, and the debt collector may take legal action if you fail to pay the debt.
If you default on a secured personal loan, the lender can take back the asset you put up as collateral.
Student loans
Defaulting on student loans can have serious consequences.
Student loans go into default after 270 days of delinquency. The consequences can include withheld tax refunds and garnished wages, garnishment of a portion of Social Security benefits, and loss of additional federal student aid.
With private student loans, the lender determines when your loan goes into default. What happens afterward also depends on the lender, but you can usually expect them to sell your debt to a debt collection agency.
Car loans
A car loan is a secured loan that uses your car as collateral. You can default on a car loan after 30 days of nonpayment. In this case, the lender can repossess the vehicle.
Additionally, there is a chance that you will still owe the money even if you lose your car. After the repossession, the lender will sell your car at auction. If it sells for less than the amount you owe, you will be responsible for paying the difference. Not to mention, the repossession is an extremely negative item on your credit report – and it remains for seven years.
How to avoid default
If keeping track of multiple loan payments has become a challenge, it may be a good idea to take a look Debt Consolidation Loan. This allows you to combine multiple balances into one loan, potentially with a lower interest rate. CNBC Select recommends Achieve if your credit is not in good standing – this loan option is characterized by relatively low interest rates and flexible terms. Or, if your credit is good, check out LightStream, which charges no origination or late fees and offers loans of up to $100,000.
Achieve® Personal Loans
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Annual Percentage Rate (APR)
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Loan purpose
Debt consolidation, major purchase
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Loan amounts
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Conditions
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Credit required
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Creation fee
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Penalty for early withdrawal
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Late fee
LightStream Personal Loans
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Annual Percentage Rate (APR)
7.49% – 25.49%* APR with AutoPay
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Loan purpose
Debt consolidation, home improvement, auto financing, medical expenses and others
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Loan amounts
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Conditions
24 to 144 months* depending on the loan purpose
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Credit required
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Creation fee
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Penalty for early withdrawal
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Late fee
The General Terms and Conditions. *AutoPay discount is only available prior to loan financing. Rates without AutoPay are 0.50 percentage points higher. Excellent credit is required to get the lowest interest rate. Interest rates vary depending on the purpose of the loan.
Debt consolidation can help you gain control of your debts. However, before you decide on this strategy, be honest with yourself. Will this really help or simply avoid the inevitable?
If you’ve looked at your budget and determined that you can easily afford to repay your debts right now, talk to your lenders. A default is not only bad news for you, but also for your creditors. Your mortgage lender will likely do their best to work with you to prevent foreclosure, and your auto lender likely wants to avoid foreclosure as well. Contact your lenders and issuers as quickly as possible and remain transparent. If you are experiencing financial hardship, you can request a deferment or forbearance, among other options.
Bottom line
Loan default can negatively impact your credit score and have long-term financial consequences, including loss of assets, wage garnishment, and more. If your debts are spiraling out of control, debt consolidation can help you avoid defaulting on your loans. However, if you don’t think this will provide much relief, contact your lender or card issuer and discuss how you can work together to avoid default. As in any relationship, communication will be key.
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