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What is a loan default?
Defaulting on a loan is the failure of a borrower to pay the principal or interest on a security or loan. For example, when a borrower fails to make monthly car loan payments, he defaults on the loan. Lenders and other investors carefully evaluate the chances of defaulting so as to minimize their risk exposure.
The consequences of defaulting on a loan depend on whether the loan is unsecured (student loans, credit cards, or personal loans) or secured (car loans or mortgages). In either case, it is suggested that consumers opt for debt consolidation plans as a means of satisfying creditors in order to avoid the repercussions of a loan default.
Personal loans are regarded as high-cost, high-risk unsecured loans. Defaulting on one can cause your credit score to plunge. As your credit score drops, interest rates on your adjustable-rate loans, such as credit cards, increase significantly.
When a borrower is 30 days late on a payment, a mark appears on his or her credit report. After 90 days late, the borrower’s account is moved to default status. When the default period reaches 120 to 180 days, the bank counts it as a bad debt, meaning a loss. However, the borrower still owes the money, and the lender either hires a debt collector or sells the account to a collection agency.
If a borrower defaults on a secured loan, such as a home equity loan, the lender has the right to foreclose on the borrower’s house. This type of loan is considered as a default when the borrower fails to make payments for 150 consecutive days.
Similarly, if a borrower defaults on an automobile loan, the vehicle can be repossessed. This means the lender takes ownership of it. Before repossessing the car, banks issue the borrower a notice giving him a specified period of time, usually a week, to make the payment. If the borrower can’t renegotiate the loan terms or meet the deadline, the lender has the right to petition the court to repossess the vehicle. After repossession, the vehicle will likely be auctioned so as to redeem the debt or pay the total amount due. If the car sells for an amount less than the one owed by the borrower, the borrower may be liable for the difference.
Example of a loan default
Failure to pay a loan, such as a car note, home loan or personal loan, is considered defaulting. A default will damage your credit. Bad credit can affect you in many ways. It can keep you from getting a mortgage, credit card or any other type of loan. It can even hurt your chances of renting an apartment or buying a smartphone.