What to Expect When You Default on a Loan


You default when you don’t make loan payments for a predetermined time. When a loan defaults, the outstanding balance is transferred to a debt collector whose job is to recover the unpaid debt.

If you default on a loan, serious repercussions could happen. If you have yet to learn it, here are the things you need to expect when you default according to the loan type you currently have. 

Secured Loan

A secured loan is a loan type that requires collateral as a security. In the event of a default, the lender will often utilize the security to cover the outstanding debt. Here’s how that appears for various secured loan types:

  • Mortgage Loan: Your mortgage provider may seize your property and sell it to recover its losses if you cease making mortgage payments.
  • Car loan: If you can’t make your car loan payments, the lender would often seize the automobile and sell it at auction to recoup its losses.
  • Secured credit card: Secured credit cards are backed by a deposit you must make to receive the card. Usually, if you miss a payment on a secured credit card, the card provider will add your security deposit to the balance you owe.
  • Secured personal loan: If you fall behind on a secured personal loan, you risk losing the security—such as money in a savings account—that was put up as security for the loan.

In all circumstances, if the lender cannot obtain sufficient funds from your security to settle your debt, it may attempt to collect the remaining balance directly from you. It can entail suing you for the money owed, which might lead to a court order garnishing your salary, a lien on your property, and other measures.

The lending company may have some money left in some circumstances, such as with a vehicle loan or secured credit card, after utilizing your collateral to settle your balance. In this case, the lender might pay you back for the surplus.

Unsecured Loans

Personal loans without collateral can be utilized for almost anything. Most people take out personal loans because they are simple to obtain, convenient as you can take out personal loans FL, TX, or wherever you are, and provide flexible repayment options. The loan period and amount are up to you to decide based on your financial needs. 

The approval of a new loan is based on several variables, including income and credit rating. Even with such latitude, borrowers frequently struggle to repay the full loan. But what happens if you default on an unsecured personal loan, then?

Your credit score will drop if you default on your unsecured loan. The lending company gives the credit reporting bureaus a report on your repayment behavior, which determines your score. Your credit score will only improve if you pay back the loan on schedule and in full. If your credit is in bad shape, it’ll be difficult for you to get a loan.

Remember that default and delinquency are two different things. The default and delinquency difference may sound just about the same in concept, which is why uninformed borrowers often interchange either term. 

The Difference Between Default and Delinquency

To better understand the effect of loan default, you should dig deeper into this topic, especially in differentiating default and delinquency. 

Loan words such as delinquency and default both refer to the same issue—missing payments—in varying degrees. The loan becomes delinquent when you don’t make your scheduled installment payments on time (even by one day).

A loan enters into default when the customer fails to make repayments or does not pay back the debt according to the terms stated in the loan agreement contract. It’s the ultimate result of prolonged payment delinquency, like not paying the agreed monthly repayment amount. A default on a loan is far more serious and will alter your borrowing arrangements with the lender and other possible lenders.

The term “payment delinquency” is frequently used to refer to a circumstance where a borrower fails to make a single payment each month for a type of financing, such as unsecured personal loans, mortgages, credit card debt, or vehicle loans. Depending on the loan type, the loan length, and the reason for failed repayment, there are repercussions for delinquency.

On the contrary, whenever a borrower doesn’t repay their loan as stipulated in their loan agreement, the loan enters default. It typically involves a series of missed payments over time. Before a debt is declared default status, lending institutions and the federal government permit a certain time. 

For instance, as per the Code of Federal Regulations, some federal loans are only deemed in default once the client hasn’t made any repayments on the loan for 270 days.

Avoid Defaulting As Much As Possible

Now that you understand what default on loan means and what it can do to you, you should avoid getting into this situation at all costs. Remember only to acquire a loan you can afford to ensure you can repay it comfortably and on schedule. Getting more income sources is also best if you need help paying your loan. These can help you ensure that you can pay on time.

Article written by Tiffany Wagner For America’s Loan Company