What Happens When You Default on These 5 Types of Debt

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what does it mean to default on a loan

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Borrowing money is a huge responsibility — you’re obligated to repay your loan according to the terms you agreed to with creditors.

“When taking out any loan, it’s important to research your loan agreement, including interest rates, monthly payments, and length of repayment,” said Katie Ross, the education and development manager for American Consumer Credit Counseling. “These details can help you calculate how much you can afford and thus help avoid loan default.”

But what does it mean to default on a loan? Default occurs when you don’t make your payments, but it doesn’t happen right away — a certain period of time must pass.

Defaulting on debt can lead to serious consequences, which vary based on the type of debt. Learn more about the dangers of defaulting on different loans, along with suggestions on what to do if you’re in danger of default.

What does it mean to default on a loan?

Every time you borrow money, you agree to make payments based on the lender’s terms. When you miss a scheduled payment, there’s a grace period sometimes before you’re considered late.

If you don’t make your payment by the time that grace period ends or by a scheduled deadline, you’re considered delinquent. If you continue to skip payments for a specified time, then your debt enters into default.

How long it takes for your debt to default depends on your lender and the type of loan. With federal student loans, for example, there’s a 270-day default timeline that’s set by law. For other types, your loan agreement specifies when you’ll go into default. Check your paperwork or contact your lender to find how much time you have before your debt is in danger of defaulting.

What happens if you default on a loan?

Whenever you default on a debt, lenders and collection agencies often try to collect the money, and the effort can happen for several years. The time lenders have to recoup their money varies by state. On federal student loans, however, lenders can try to collect forever.

Most lenders also report your default to credit reporting bureaus and your credit score will plummet, making it difficult to borrow money in the future. Defaults usually stay on your credit report for seven years, although you can begin rebuilding your credit immediately by making payments on time and using credit responsibly.

Other impacts of a default depend on the type of loan you have, the amount you owe, and how aggressive your lender is in its effort to recoup the money.

Here are the consequences you could face for defaulting on five types of loans.

1. Student loan debt

“When you go into student loan default, it can take years to recover financially,” said Ross. Defaulting on a student loan can result in:

  • The full unpaid loan balance, plus interest, becoming due immediately
  • Charges for attorney fees and collection costs
  • Loss of eligibility for income-driven repayment plans, deferment, or forbearance
  • A lawsuit by the student loan lender
  • Wage garnishment, in which money is automatically taken out of your paycheck to repay the lender
  • Seizure of your tax refund and loss of other federal benefits
  • Your school withholding your transcript
  • Your state revoking your professional license
  • Private student loan lenders trying to collect from any cosigners

Student loans also can’t be discharged in bankruptcy in most cases, so you’ll be stuck dealing with this debt for life.

2. Personal loan debt

The repercussions of defaulting on a personal loan depend on whether it’s is secured or unsecured, according to Ross.

“Secured personal loans are backed by collateral. If you default on a [secured] personal loan, you risk losing the assets you used as collateral,” she explained. “If you default on an unsecured loan, the loan might be turned over to a collection agency.”

This means you could face:

  • Loss of assets, such as a car or savings account, that serve as collateral for secured loans
  • Lawsuits and charges for legal fees
  • Wage garnishment, or money being taken from your paycheck after a court judgment
  • Lien on a property after a court judgment, which gives the lender a legal claim on your property. When the property is sold, the lender receives a portion of the sale proceeds to satisfy the lien.

3. Mortgage

Your house acts as collateral for your mortgage, so it’s at risk if you default on the loan.

“Mortgage default can result in the lender filing for foreclosure in order to auction off the house for repayment of the debt,” Ross said. “Foreclosure proceedings take anywhere from one to two years.”

The impact of failing to pay your mortgage includes:

  • Foreclosure proceedings in court
  • The seizure and sale of your home
  • A deficiency judgment. If your lender sells your home for an amount that’s less than what you owe, it could get a judgment against you for the balance. If that happens, you might be responsible for the remaining loan balance plus legal fees.
  • Wage garnishment and liens on other properties if the lender gets a delinquency judgment

4. Car loan

Auto lenders are very strict when it comes to loan repayment, according to Ross. “Just a few missed payments and your car could be repossessed,” she said.

The consequences of missing a car loan payment include:

  • Repossession of your vehicle, sometimes without advanced notice. If your vehicle is repossessed, you are entitled to the return of any property that was in your vehicle at the time of the repossession.
  • A deficiency judgment. If the repossessed car sells for less than what you owe, you could be required to pay the remaining balance plus fees associated with repossession.
  • Wage garnishment and liens on your property. That can happen if the lender gets a court order to collect a deficiency balance.

5. Credit card debt

When you default on a credit card, creditors typically charge off your account, which means they acknowledge the debt isn’t likely to be repaid. The debt might be sold to a collections company.

In addition, agreements with your creditors might specify that defaulting on any account means you’ll trigger a penalty interest rate on other unrelated credit card accounts. This practice is called universal default, according to Ross.

The consequences of defaulting on your credit card could also include:

  • A lawsuit against you for the unpaid balance, fees, and legal costs
  • Wage garnishment, or a court order to take money from your paycheck to pay the lender
  • Lien on your property, or a legal interest on your property given to the lender by court order
  • Penalty interest rates on other credit cards

What should you do if you’re in danger of defaulting?

If you’re unable to make loan payments, your lender might be willing to work with you to help avoid default. Talk to your lender about your options. Depending on your loan type, you could consider:

  • Putting your loan into deferment or forbearance: For private and federal student loans, you might be eligible to temporarily pause your payments with deferment or forbearance.
  • Entering into a repayment plan: Credit card companies and mortgage lenders, in particular, might be willing to rework the terms of your loan so you can afford to repay it. Federal student loans also offer specialized repayment plans that could lower your monthly bill.
  • Refinancing: If your credit is in good standing, you might be able to take a new loan to pay old debt. If you can refinance your debt, you could secure a longer repayment term or a lower interest rate, both of which could make your monthly payments more affordable.

Don’t give up hope if you’re struggling to pay your bills. Once you understand what it means to default on a loan, you can explore ways to prevent it.

If the worst-case scenario happens and you do default, it’s possible to repair the damage and rebuild your credit over time.

Interested in a personal loan?

Here are the top personal loan lenders of 2019!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.990% APR (with AutoPay). Variable rates from 5.74% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.72% APR assumes current 1-month LIBOR rate of 2.49% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 9.99% APR to a high of 35.99% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

5.74% – 16.99%1$5,000 - $100,000

Visit SoFi

7.54% – 35.99%$1,000 - $50,000

Visit Upstart

7.99% – 35.89%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

5.99% – 29.99%3$7,500 - $40,000

Visit FreedomPlus

6.79% – 20.89%4$5,000 - $50,000

Visit Citizens

9.99% – 35.99%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.