Default On A Loan Guide: Consequences And Tips On How to Avoid It

Camino Financial10 Jan 2024
Default On A Loan Guide: Consequences And Tips On How to Avoid It
Defaulting on a loan is stressful, but you can still fix it. By understanding the process and taking action, you can get back on track and regain control of your finances. In this guide, we'll walk you through everything you need to know about defaulting on a loan and show you that there's always a way forward, even in difficult times. So let's get started on your journey to financial stability!
Table of Contents
1. What is defaulting on a loan?
2. What happens when you default on a loan?
3. Consequences by type of loan
4. Tips to avoid defaulting on loans
5. How to get out of a loan default
6. What you need to do if your overdue loan was sent to collections
7. FAQs

What Is Defaulting On A Loan?

Defaulting on debt means that you have failed to make the required payments on the loan as per the agreed terms and conditions. It can have serious consequences, such as:
  • late fees
  • penalties
  • increased interest rates
  • damage to your credit score regardless of the total amount of the loan
  • the lender may take legal action against you to recover the amount owed, which could result in wage garnishment or seizure of assets
You can default on any loan, including:

Loan Default vs. Delinquency

Loan 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 when 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 severe 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 Before A Lender Considers A Loan As Defaulted?

Just one day after a missed loan payment, the lender will consider the loan delinquent. If you miss a payment, an average grace period of 15 days allows the borrower to make a minimum payment to the loan servicer without incurring any penalties. After the grace period, a loan usually defaults when payments stop over weeks or months, according to the lender agreement. The payment terms and conditions of loans vary by the type of loan, occurring anywhere from 30 days to 270 days after payment ceases.

Why Do People Allow Their Loans to Default?

Default debt can occur when borrowers experience financial hardship like job loss, lost wages, divorce, or natural disasters. The most common loan default occurs when the borrower misses multiple payments on the schedule over several weeks or months. Borrowers can knowingly default if they are unwilling or unable to make payments. Others can mistakenly default on their loan by thinking they've sent their payment via autopay, or they missed payment notices when their address changed. If you notice that your autopay hasn't gone through or moved recently, ensuring you are not accidentally missing any payments before you risk defaulting on your loan is worthwhile.

Loan Default Statistics

You're not alone if you have defaulted on your small business loan. At the end of June 2020, during the COVID-19 pandemic, 8.2% of U.S. mortgages were delinquent as job losses and lost wages were rampant for salaried and gig workers. These rates are similar to those of other loan types. For example, approximately 7% of student loan borrowers defaulted at the end of 2021. These numbers show that, while no one likes to think about defaulting on their loans, it happens far more often than expected. If you're struggling with loan payments and concerned about the negative consequences of delinquent loans, you're not alone.
#DidYouKnow The severity of the delinquencies on credit reports depends on the amount of the delinquency, how recent it is, and how frequently it occurs.

What Happens When You Default on a Loan? General Consequences

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. Most creditors assume that the borrower "does not intend to pay" and consider the loan defaulted if the borrower fails to pay for 180 days. This causes the lender to consider a loan to be delinquent. A defaulted loan can have serious, long-term effects that can negatively impact your financial health and future borrowing opportunities.
#DidYouKnow Once you pay your past-due amount and stay current with your remaining payments, you will immediately stop the influx of penalty fees that negatively impact your credit score.

Consequences To Your Credit Score

Not paying a loan 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. Your credit score could drop 40 to 150 points when a loan payment defaults. Since credit scores are out of a range from 300 to 850, this can be a significant drop.

It Can Cause Problems With Other Lenders

Defaulting on a single loan can cause other creditors to close their loan agreements with you. It can also impact financial products' costs, rates, and availability with other providers. Lenders often consider individuals who have defaulted on loans as higher-risk borrowers, resulting in higher interest rates for them.

You Could Face Legal Action

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.

You'll Have To Deal With Debt Collectors

Defaulting can also mean the lender will send your account to a debt collection agency. At this time, the borrower will hear from the debt collector and no longer hear from the original lender. Debt collection agencies can also legally take you to court to seize your wages, leaving you vulnerable to covering court costs and other incurred fees.

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.

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 the borrower will forfeit it in the event of debt default. Lenders prefer secured loans 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 that requires no 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
#DidYouKnow Unsecured loans have agreements to repay your lenders, like personal loans or credit card debt, whereas secured loans require assets you could lose if you don’t fulfill the loan’s terms, like your car or home.

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.

Personal Loans

A personal loan is an unsecured loan for personal use, such as home improvement, debt consolidation, or other personal expenses. Unlike secured loans, such as mortgages or auto loans, personal loans do not require collateral. Personal loans are typically repaid in fixed monthly payments over two to seven years.
  • Time to default: 30 days for personal loans.
  • Potential consequences: If you have unsecured debt, you may face a lawsuit that could force repayment through wage loss, or the lender may repossess your property until you pay the debt.

Auto Loans

An auto loan allows 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, 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

Federal 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.


A mortgage is a type of loan to help purchase a real estate property, such as a house or a commercial building. They are typically long-term loans that can last for 15 to 30 years. The property that you'll purchase is the security itself. This means that if the borrower fails to make their mortgage payments, the lender can foreclose on the property.
  • Time to default: 60 days.
  • Potential consequences: Possible foreclosure of the home and repossession of the property.

Tips To Avoid Defaulting On Loans

  • Understand the loan. Another critical aspect of loan repayment is understanding the loan agreement, such as the type of loan you receive and the repayment terms. Reviewing the details and asking questions about hidden charges or clauses will help you avoid this issue.
  • Contact your lender. If you're about to miss a payment date, act fast to avoid defaulting. First, speak to your lender, who may enroll you in programs for deferment or forbearance or offer a loan modification or restructure.
  • Create a budget. Ensure you create a realistic budget, including your loan payments and other bills and expenses. Stick to this budget as closely as possible.
  • Make timely payments. Set up automatic recurring payments or reminders so you never miss a payment. If you're having trouble paying, contact your lender as soon as possible to discuss your options.
  • Plan for unexpected expenses. Set aside an emergency fund so you have money to cover unexpected expenses like car repairs or medical bills. This can help you avoid missing a loan payment because of an emergency.
  • Avoid taking on too much debt. Only take on loans you can afford to repay. Don't borrow more than you need; try to pay off your loans as quickly as possible.
  • Seek financial advice. If you're struggling to manage your finances or pay off your loans, consider seeking the advice of a financial counselor or advisor. They can help you devise a plan to manage your debts and avoid defaulting on a loan.

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 you need to make 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 can 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 you will make payments. Setting up automatic payments to ensure you make them on time each month may also be beneficial.

Debt Consolidation

Increase loan repayment terms, lower interest rates, and combine monthly bills by streamlining your balances into a new loan. This option helps you pay former creditors.


Refinancing allows you to increase the loan term to space out the payments. It will lower your monthly payment amounts if you qualify for a lower interest rate and may also lower your monthly payments if you choose a longer loan term.

Get A Balance Transfer Credit Card With An Introductory 0% APR

Balance transfer cards often charge a fee to transfer debt, but it can be worth it. Moving your high-interest debt to a 0% interest rate card can give you up to two years of breathing room to pay off the principal, making all the difference.

Contact Financial Advisors

Consider working with a debt counseling service that offers free or low-cost services to help you create a budget and determine the next steps.

Reevaluate Your Spending Habits

To create a budget that leads to healthier finances:
  • allocate 20% to debt
  • 50% to your needs
  • 30% to your needs
While this may not help you immediately, it can help you better plan for your long-term financial goals.

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. You can do this by:
  • making all payments on time
  • paying down any outstanding balances
  • keeping credit card utilization low

Other tips

  • 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.

What You Need To Do If Your Overdue Loan Was Sent To Collections

Continual calls from collectors can be intimidating and often overwhelming. You can reduce the consequences of loan default on your financial health by following these steps:
  • Catch up on your payments. Once you pay the past due amount and catch up on your remaining payments, you'll immediately stop penalty fee charges from negatively impacting your credit score.
  • Consider debt restructuring programs. If you know you'll have a hard time making payments, talk to your creditor as soon as possible. This can make all the difference. They may be able to help you restructure your payment plan or enroll in deferment or forbearance programs.
  • Keep an eye on your credit score. When your loan default is under control, don't forget to keep monitoring your credit history to make sure it doesn't include errors. This can also help you recover your credit score after a delinquent or bad loan.
#CaminoTip It is important that you know your rights under the Fair Debt Collection Practices Act and consider speaking with a lawyer if your lender or collection agency has decided to sue you.

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.


What are the most common reasons for a defaulted loan?

Loans default due to non-payment. The most common reasons for non-payment of loans are illness and job loss.

What are the loan default consequences?

Loan default consequences are damage to credit, risk of lawsuits, repossessions, wage garnishment, and asset seizure.

What does it mean when a loan is delinquent?

Missing payments result in a delinquent loan. Lenders may charge additional fees and penalties the day after a missed payment. Delinquent loans are easier to correct than loans in default.

How long does a default stay on your credit report?

A default stays on your credit report for up to seven years. Within this time, potential lenders and other creditors may view and judge the "default" status as part of their decision-making process when assessing the risks associated with offering you credit or providing service to you.

Is it a crime to default on a loan?

Defaulting on a loan in the United States is not a crime, but it can still have serious consequences. If you fail to make the payments agreed upon in your loan contract and do not cooperate with the lender, they may take legal action against you to collect what's owed.

Do lenders forgive loans that have a default status?

It depends. Loan forgiveness means a lender relieves the borrower from paying the entire loan or part of it. For instance, student loan forgiveness is possible for some non-profit workers but generally includes dense requirements to qualify, whereas Small Business Administration loans that have defaulted are not eligible.

What happens if you can't pay your loan?

Creditors will charge fees and impose penalties on borrowers who cannot repay their loans before taking legal action or negatively affecting their credit score. The lender may offer options to deal with the outstanding debt. For instance, mortgage loans have a variety of options to avoid foreclosure. If you know you won't be able to pay your loan, talk to your lender as soon as possible to evaluate all available options.

Is defaulting on a loan a crime?

Generally, no. It is possible to face arrest for not paying a 'civil debt,' like a hospital bill or the balance on your credit card or loan, but it's unusual. However, the risk of arrest increases when borrowers fail to appear at their designated court date.

How to fix a defaulted loan?

To fix a defaulted loan:
  1. Contact your lender and explain your situation.
  2. Understand your options, such as forbearance, deferment, or loan modification.
  3. Stick to a budget that allows you to pay all your bills on time.
  4. Consider consolidating multiple loans into one loan.
  5. Stay in contact with your lender and update them on any changes in your situation.

What happens if I default on federal student aid?

The first consequence of defaulted payments for federal student aid is acceleration, meaning that the borrower must pay the remainder immediately. The government can withhold tax refunds and federal benefits until the debt is fully repaid.

What's an example of defaulting on a loan?

Suppose someone took out a car loan and failed to make a monthly payment for several months. This would violate the loan agreement, and the lender can mark the loan as "default." The lender could then take action to recover the debt, such as sending the account to collections, reporting the default to credit bureaus, or even repossessing the car.

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