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What are the consequences of defaulting on a loan?

Your credit score will take a hit, and you could even get sued.

Updated

Defaulting on any loan will damage your credit and make it more difficult to borrow in the future. But the specific ways it can affect your life will depend on the type of loan you borrowed.

What is loan default?

Lenders consider you in default after you failed to pay back your loan based on the schedule set in your loan agreement. The full amount of your loan will usually become due immediately, and you could face legal action if you fail to repay.

Lenders are able to charge a number of fees for late payments and defaulting. And it will have a negative impact on your credit score for years, making it difficult to be approved for other loans or credit cards in the future.

When is a loan considered in default?

Unfortunately, there is no standard for when a loan is considered in default. A personal loan may be in default after just one missed payment. A federal student loan won’t be considered in default until you’re 270 days late — before then, your account is only considered delinquent.

Here’s a breakdown of when most types of loans are considered to be in default, but again — it varies by lender.

Type of loanWhen your loan is considered in default
Personal loansUsually 30 to 90 days after missing a payment
Student loans270 days (federal) or 60 to 90 days (private) after missing a payment
Car loansAround 90 days after missing a payment
Mortgages120 days after missing a payment
Short-term loansVaries

What are the consequences of defaulting on a loan?

You can expect a severe hit to your credit score and a number of fees. But other consequences will depend on the type of loan you borrowed.

Personal loans

Because personal loans can either be unsecured or secured, the consequences of defaulting are different for each.

  • Unsecured loans. When you default on an unsecured loan, your lender will charge additional fees and may choose to take you to court. If a lawsuit is successful, you could be on the hook for court fees and your wages could be garnished.
  • Secured loans. If your loan is secured by property or a savings account, that asset can be seized by the lender. It will either be liquidated or sold, depending on the asset. But if there isn’t enough to cover your loan, you’ll still owe money — and may face similar consequences to defaulting on an unsecured personal loan.

Consequences and next steps after defaulting on a personal loan

Student loans

While you won’t lose any property or assets when you default on a student loan, you will certainly hurt your chances to borrow in the future.

Federal student loans have some of the most substantial consequences — but default doesn’t occur until you’re 270 days late, or about nine months. This gives you a substantial amount of time to speak to your loan servicer and find an alternate payment plan. However, if you do default, expect to have your wages and tax refund garnished, your federal loan benefits stripped and a potential lawsuit on your hands. All of this is on top of numerous fines and fees.

Private student loans don’t carry the same consequences. You will certainly face fees and a lower credit score, but specific repercussions depend on your lender. Check your loan contract or contact your loan servicer to learn the potential costs.

An in-depth look at the consequences of student loan default and how you can reverse it

Car loans

Car loans are typically secured by the vehicle you’ve purchased. This means your lender will be able to repossess your car if you default. However, that’s not the end of it. Your lender may then choose to sell it at an auction. If it’s sold for less than the amount of your loan, you’ll still owe money. This can make a difficult situation even worse, so if you think you may be late on a payment or unable to meet your financial obligation, talk to your lender as soon as possible. In many cases, it may be able to work out a payment plan or suggest alternate options to help you avoid default.

The full consequences of defaulting on a car loan

Mortgages

Like secured personal loans and car loans, a mortgage uses your home or property as collateral. If you default, your home can be repossessed, resulting in foreclosure. The Consumer Financial Protection Bureau (CFPB) prohibits lenders from beginning foreclosure proceedings until you’re 120 days late on a payment.

Because a home is one of the most valuable assets, avoiding default is key. Talk to your lender after your first missed payment to see if you can renegotiate the terms of your agreement. Many are willing to work with homeowners who’ve hit a financial hardship — especially if you have a previous record of on-time repayments.

Short-term loans

Defaulting on a payday or installment loan is expensive. Depending on your state’s laws, your lender may be able to continuously try to withdraw funds from your bank account — and when it can’t, you’ll be charged fees by the lender and by your bank. If you fail to make repayments, your lender can take you to court. This could leave you responsible for paying all the original fees, late fees and court fees related to your case.

Missing payments on an auto title loan has more severe consequences. Because you use your car title as collateral, your lender will be able to repossess your car. Like with auto loan default, your car will be sold at auction. If it’s not enough to pay off your balance, you’ll still owe your lender the remaining amount due.

Tactics for handling payday loans after default

Bottom line

Default can have an impact on your credit and finances for years to come. If you haven’t yet defaulted on a loan, speak with your lender to discuss alternate payment plans. And if you have entered default, talk to a lawyer — they may be able to guide you toward a solution that fits your unique financial situation.

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