Loan Default – An Ultimate Guide 2022
Loan default occurs when a borrower fails to repay the loans as promised. Statistics of the lending tree say that more than 20 million Americans owe personal loans that collectively amount to $178 million. Out of these borrowers, there may be a high possibility of a few failing to repay loans as expected. This article will help you have a detailed understanding of loan default.
When a borrower is struggling to repay the loans, the loans may become past dues or loan default. You may have heard of the terms “past due”, “loan default” and “collections”. All of these terms mean different things, but they are all to be avoided. Do you Need to Know; How Loan Default Affects Credit Scores? Keep reading this article.
What Does Past Due Mean?
Past due simply means a late payment. If your payment is 30 days past due, then the payment has not been received, and it was due 30 days prior.
Credit cards and other revolving lines of credit will apply your past due payment to next month’s payment while also tacking on a fee. It could also mean that you will have a higher, penalty interest rate.
Installment loans are usually not quite so nice about it. An installment loan has a threshold for how long it will accept a late payment before the loan goes into default. However, installment loans may have a ‘grace period in which time you can send in a loan payment without a penalty.
To learn what would happen if your payment goes past due, check the terms of the credit card or loan.
Past-due payments do end up on your credit report and they do negatively affect your credit score. So avoid them!
What Is Loan Default? How does Loan Default Affect Credit Scores?
If a loan goes into default (or if you default on your loan), that means that you have failed to uphold your promise to pay back the loan.
So, what does loan default do to your credit score? The consequences of defaulting on a loan can be enormous. The first thing that happens is that it ends up on your credit report. A loan in default is a major black mark on your credit report and will cause your credit score to drop significantly!
What’s worse is that a loan default will stay on your credit report for up to seven years. This derogatory item could affect your ability to get loans for nearly a decade. So a loan default should absolutely be avoided!
A good way to remember it is: a past due payment will cause a loan to go into default. If a loan goes into default, it could go to collections. To learn more about items in collections, check out our article on collections and how it works! Now that you know what loan defaults do to your credit score, you need to learn how to avoid them.
How Do I Avoid Default?
Avoiding default is largely common sense. To avoid default, make your payments on time and make sure they’re being received by the correct payee as late payment can hurt your score badly! If you pay your bills on time, you won’t ever have to worry about a loan going into default. And, your credit score will go up over time.
But sometimes life gets in the way, and you might be unable to make a payment on time. If this is the case, discuss your options with your lender. Here are some options you might want to choose from:
Payment deferment: This is an agreement that you can make with some lenders to defer payments on the grounds that you will pay back the loans after the deferment period is up. Interest will still accrue so your payments may be higher. It may also require that you make a small ‘good faith’ payment upfront which goes toward your balance.
Lower payments: You can also discuss options with your lender for lowering your payment amounts. This will lengthen the amount of time that it takes to pay down your loan. However, it’s still better than going into default.
Student loans offer more options for deferring payment to avoid default. You can defer payments if, for example, you choose to go back to school (or are currently in school). You can also request a period of forbearance from your student loan lenders. A forbearance is a form of payment deferment specific to student loans, and it does not affect your credit. You can request up to 12 months of forbearance per loan.
Avoid going into debt to make a payment! That just lands you in a cyclical trap. It’s much better to call the lender and figure out what you can do.
I Have An Item In Default, What Do I Do?
If you have a loan in default, you still have options. After all, lenders don’t actually want to put a loan into collections. When they put a loan into collections, they’re selling the debt for pennies on the dollar to a company that will simply hound the people who owe them money. It’s a write-off and represents a loss.
Ultimately, the lender wants their money back, so lenders are willing to work with you.
Most lenders will accept an agreement to pay off the balance to have the item removed from your credit report. If you are able to do this, great! If not, there might be other things you can do.
Call your lender and discuss payment plan options. They’ll likely be sympathetic to your plight, and since they do still want your money, they should be willing to work with you.
You have to call the lender and make sure they haven’t already started the collections process.
Frequently Asked Questions
1. What is loan default?
Loan default is the stage where the individual, organization, or country fails to repay the interests or the principal amount of the debt. This is when the loans will default.
2. How does loan default affect credit scores?
A late payment is considered a negative sign in credit score calculation. In this case, the inability to pay off the loans on time will vigorously affect the credit score because this creates doubt in loan vendors about the user’s creditworthiness.
3. What is past due?
Past due is the stage that denotes the delay in due payment. When the due payment exceeds by 30 days, they are called past due.
This article clearly explained how can a delayed payment or default loan affect the credit score of the customer. To fix this issue, users can try fixing it on their own by maintaining a proper repayment in the future. If you need help removing an old default item from your credit report, call The Credit Pros at 1-800-411-3050. We will stick up for you and make sure that the credit bureaus strike that black mark from your report, saving your financial future in the process. Call today!