When you default on a loan, it can have several implications, from financial stress to potential damage to your credit score.

That is why it is important to understand why it happens and thus make better decisions.

This article breaks down everything you need to know about what happens if you default so you can protect yourself financially now and in the future.

What Does Default Mean?

Defaulting occurs when the borrower fails to make timely loan payments as outlined in the repayment agreement.

When a loan defaults, the borrower has not met their financial obligations and is at risk of getting into serious trouble. Sometimes, lenders may even take legal action against borrowers who have failed to meet their repayment requirements.

Defaulting on a loan can have far-reaching financial and legal implications, so it’s important to ensure that you do not fall into this situation.

Loan Default vs. Delinquency

Delinquency and default are terms relating to the same problem (not making payments on a loan) but representing different degrees of that problem.

• A delinquent loan is a loan where the borrower makes late payments or misses a regularly scheduled payment.
• A delinquent loan becomes a debt default when the borrower exhibits behaviors consistent with failing to repay a loan. These behaviors include excessive payment delinquencies or missing payments.

Payment default is more serious than delinquent payments.

Delinquency suggests a borrower who is late with payments but still shows consistent efforts to repay a loan. Payment default suggests to a creditor that a borrower no longer intends to repay a loan.

What Happens When You Default on a Loan?

When you default, the lender will try to find out what happened.

Probably the first thing they’ll do is contact you to ask what happened or send you a payment reminder because defaults usually have a simple explanation: the debtor forgot.

If the problem persists, the lender will continue to try and contact the debtor, probably through their collections department, to try and remedy the situation.

General Consequences of Loan Default

The consequences depend on the loan type you defaulted on and the lender.

That said, the lender can generally charge late fees and seek repayment through other means.

Additionally, borrowers risk wage or tax refund garnishing.

Wage and tax refund garnishing is a legal process available to creditors. Creditors can seek a judgment against those in debt default, using a court order to withhold money for debt repayment.

Another consequence of loan default is damaged credit. It results in a negative entry in your credit reports, lowering your credit score. This issue may prevent you from obtaining credit or loans in the future.

Defaulting can also mean that your account is sent to a debt collection agency. At this time, the borrower will hear from the debt collector and no longer hear from the original lender.

As a last result, lenders may take legal action against the debtor.

Consequences by Type of Loan

There are several common types of loans borrowers may identify based on the purpose and function of each loan.

Secured Business Loan

A secured business loan requires collateral that becomes available to the lender if the loan defaults.

Time to default: 3 – 6 months.

Consequences of default:

• When assets are imperative for business operations, asset seizure may result in business closure.
• The lender may sue to collect the debt, resulting in legal fees and more debt, such as legal fees, penalties, and interest.

How to avoid default:

• Communicating with the lender
• Restructuring the loan
• Debt consolidation

Unsecured Business Loan

Operates the same as a secured business loan but without requiring collateral. Unsecured business loans are generally for entrepreneurs with high personal credit ratings.

An unsecured business loan often requires a guarantor, who takes responsibility for paying back the loan if the creditor cannot repay the loan.

Time to default: 3 – 6 months.

Consequences of default:

• Late fees
• Increased interest rate
• Legal action taken by creditors to recoup losses, imposing liability on the loan guarantor, including seizure of assets.

How to avoid default

• Communicating with the lender
• Restructuring the loan,
• Debt consolidation.

Apply For A Business Loan!

Unsecured Business Loan with Personal Guarantee

An unsecured business loan with a personal guarantee is a loan for business purposes requiring a personal guarantee from anyone who owns twenty percent or more of the business.

A personal guarantee is an official, legally binding agreement between a creditor and a business owner. It states that the business owner is responsible for the company’s debt.

Time to default: 3 – 6 months.

Consequences of default:

• Damage to the guarantor’s credit score
• Risk of asset seizure for the loan guarantor.

How to avoid default:

• Communicating with the lender
• Restructuring the loan,
• Debt consolidation.

Secured Personal Loan

Secured personal loans require collateral, an asset legally pledged as security for loan repayment, and will be forfeited by the borrower in the event of debt default.

Secured loans are preferred by lenders when a borrower has a lower score. Secured personal loans are riskier for the borrower. They offer a way to receive a loan when no other options are available.

Time to default: 150 days.

Consequences of default:

• Asset seizure.

How to avoid default:

• Contact your lender
• Refinance
• Consider debt consolidation.

Unsecured Personal Loan

An unsecured personal loan is also known as a signature loan. It is a personal loan given without collateral, and an unsecured personal loan works for those with excellent credit.

Time to default: 30 days.

Consequences of default:

• Late fees
• Risk of a wage garnishment
• Drop in credit score

How to avoid default:

• Manage your borrowing
• Track your loans
• Keep good records
• Communicate with the lender
• Consider debt consolidation

Credit Cards

Similar to a loan, credit cards are an extension of credit. The difference between loans and credit cards involves credit advancements and repayment.

Using a credit card activates borrowing funds to pay a merchant for goods and services. With each purchase, the creditor advances funds to the merchant and then adds the amount to your balance due.

Then the creditor bases your payment amount owed on the amount of your balance, plus interest or fees at any given time.

Time to default: 6 months.

Consequences of default:

• Closed account
• The account sent to a collection agency
• Risk of legal action
• Damage to credit score.

How to avoid default:

• Negotiate with creditors
• Consider debt consolidation.

Auto Loans

Auto loans allow borrowers to cover the price of the car minus any down payment they have available. The car or vehicle serves as collateral for the loan, and if a borrower defaults on the loan, the car is at risk of repossession.

Time to default: 90 days.

Consequences of default:

• Repossession of vehicle
• Damage to credit resulting in an inability to qualify for loans in the future.

How to avoid default:

• Refinance the loan
• Negotiate with the lender
• Debt consolidation.

Student Loans

Student loans are available from the federal government or private lenders to help pay for college, graduate school, or trade school. Federal student loan payments are more forgiving, offering deferment, forbearance, and income-based repayment options.

Private lenders offering student loans require a credit check and have strict loan terms. Student loans do not require repayment until a student graduates or leaves school.

Time to default: 270 days.

Consequences of default:

• Damaged credit
• It may disqualify you from applying for more student loans or financial aid.
• Loan acceleration resulting in the entire amount due immediately
• Disqualification from deferment or forbearance
• Risk of wage or tax refund garnishment
• Withheld transcripts or certification from the school.

How to avoid default:

• Track loans and payments online
• Consider loan consolidation.

Tips to Avoid Defaulting on Loans

It is advantageous to plan carefully before taking out a loan. Borrowers must understand their finances and plan for repayment to avoid defaulting on loans.

Another critical aspect of loan repayment is understanding the loan agreement, such as what type of loan you are receiving and the repayment terms.

Reviewing the details and asking questions about hidden charges or clauses will help you avoid this issue.

Other tips include:

• Keeping all information about your loan organized and readily available.
• Tracking all loans online
• Scheduling auto-draft payments.
• Notify creditors of name and address changes promptly.
• Communicate with your creditors if you run into financial problems or become unemployed.
• If you foresee financial problems, consider debt consolidation early rather than when loans default.

One great option is to use a loan calculator to understand how much you’ll pay each month. This can help you understand if you can afford the loan.

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How to Get Out of a Loan Default

First, getting out of a loan default requires open communication with creditors.

For student loans, options for getting out of default include rehabilitating or consolidating your loan. Other types of loans may be more challenging to get out of default.

However, options such as contacting the lender to work out a payment plan, signing up for debt management, or taking out a debt consolidation loan may be available.

Here are some steps you could follow:

Understand Your Financial Situation

Analyze what led to the loan default and determine which loans are currently in default.

This will help you create an accurate budget and determine what changes need to be made to rebuild your credit.

Negotiate With lenders

Reach out to your creditors and explain the circumstances that led up to your loan going into default status. Ask if they would consider lowering the rate or extending the repayment period so it’s more manageable.

Many creditors are willing to work with borrowers in this position, and if you’re able to negotiate a better deal, it could make getting out of your loan default much easier.

Then, create a reasonable repayment plan that outlines how and when payments will be made. Setting up automatic payments to ensure they are made on time each month may also be beneficial.

Monitor Your Credit Score and Rebuild it

Regularly monitoring your credit report is a great way to stay on top of any changes that could affect your loan default status. Doing this allows you to spot inaccuracies quickly and dispute them if necessary.

It’s also important to start rebuilding your credit score as quickly as possible. This can be done by making all payments on time, paying down any outstanding balances, and keeping credit card utilization low.

What Happens if I default on a Camino Financial Loan?

Not paying a Camino Financial loan will negatively impact your credit history because we report payment history to credit bureaus. In contrast, paying on time will help you improve your score.

Furthermore, collection activities will occur, these include calls and additional fees and could lead to litigation if the loan remains unpaid.

Of course, litigation is a last-case scenario we don’t want to happen.

You are our priority; we want to help you grow your business, not hinder it. That’s why we have automatic payments that are withdrawn from your bank account each payday, that way you’ll never forget to pay.