A loan default can have serious consequences

A loan default is a frightening possibility if you are behind in debt payments or have financial difficulties.

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Despite the wider economic downturn, default rates on consumer loans fell to record levels in 2020 and 2021. This surprising phenomenon is due to COVID-19 relief measures like enhanced unemployment benefits and stimulus payments.

What does it mean to default on a loan?

A default on a loan is when you have failed to pay your loan payments as agreed to and the lender has concluded that you are not able to continue making payments. A default is more serious than a delinquency which can occur after one late payment or missed payment. It fundamentally alters the nature of your loan.

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According to Amy Lins (vice president of enterprise learning at Money Management International), a non-profit credit counseling organization based in Sugar Land Texas, most lenders will report missing payments to credit bureaus within 30 days. Your lender may consider your loan defaulted if you continue to miss payments. Lins says that private loans such as student loans and personal loans can be extended to allow for payment delays.

How does loan default work

Although the terms default and delinquency can sometimes be used interchangeably, they mean different things. April Lewis-Parks is the director of corporate communications at Consolidated Credit, a national credit counseling organization. She says that if you fail to make a payment or are late, your loan will be considered delinquent. Delinquent payments can lead to late payment fees and other penalties depending on your loan agreement. However, it won’t usually affect your credit score unless you are more than 30 days late.

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Car loans: Your vehicle is the collateral for your loan. If you fail to make your payments, your lender can take your car away and attempt to sell it. Lins says that if the car’s value is less than the amount owed, lenders have the right to sue you and obtain a judgment against your for the difference. If you owe $17,000 on a car loan that was not paid, and the lender is unable to sell the vehicle for $15,000 or less, the lender might file legal action to recover the $2,000 remaining.

Mortgages: Your mortgage is secured by your home. If you default on your loan, the lender will seize your property through foreclosure. The process of foreclosure will differ from one state to the next. Certain states require a court foreclosure. This requires the lender get a judgement from the courts. Other states allow non-judicial foreclosures. The lender does not have to go to court, so the process may be much quicker.

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Private student loans are treated in the same way as credit cards and personal loans when they become defaulted. Federal student loans are subject to a different process. Federal loans are considered late if it has been more than 30 days since the last payment was made. It is considered to be in default if it reaches the 270-day mark. The federal government can garnish wages without a court order for student loans. Most other types of debt, however, require a creditor’s permission to bring you to court.