A default happens when you have skipped one or several payments in a row on a loan or credit card. Since defaulting can cause your credit (and overall financial health) to quickly plummet, you want to do your best to avoid it.
CNBC Select breaks down what happens when you default on various types of debt and what you can do to prevent it from occurring.
What happens when you default on a loan
- What leads to a loan default
- How a default works by loan type
- How to avoid a default
- Bottom line
What leads to a loan default
If you're a couple of days late paying your loan or credit card bill, you most likely won't default just yet, thanks to a grace period many lenders and issuers extend to borrowers. The length of grace periods can vary depending on the loan type and lender and typically ranges from 30 days to 90 days.
Once the grace period is over, your account becomes delinquent. At this point, the lender can report delinquency to the credit bureaus, causing your credit score to drop. The longer the delinquency, the more harm it inflicts on your credit. What's worse, this delinquency will linger on your credit report for seven years (counting from the first month of consecutive missed payments).
You can check your payment history by signing up for a credit monitoring service. For instance, *Experian free credit monitoring will alert you to any missed payments, as well as how long any accounts have been delinquent.
Experian Boost™
On Experian's secure site
Cost
Free
Average credit score increase
13 points, though results vary
Credit report affected
Experian®
Credit scoring model used
FICO® Score
Results will vary. See website for details.
How to sign up for Experian Boost:
- Connect the bank account(s) you use to pay your bills
- Choose and verify the positive payment data you want added to your Experian credit file
- Receive an updatedFICO® Score
Learn more about eligible payments and how Experian Boost works.
If you continue to miss payments, you risk turning your delinquency into a default. In this case, the lender may try to collect the missed payments or sell the debt to a collection agency. A collection on your credit record can deal another blow to your credit, also lingering on your reports for seven years. And if you have secured debt, you may lose the collateral (such as your car for an auto loan or your house for a mortgage).
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How a default works by loan type
It's never good news to default on your debt, but what exactly you can expect next depends on the type of loan.
Credit cards
Typically, when you haven't paid at least the minimum credit card payment for six months, the issuer will give up waiting and your account will be in default. If you have defaulted on a secured credit card, the security deposit you paid will be applied to the debt. As for unsecured credit card debt, the issuer will probably send it to collections.
A collector will attempt to settle the debt with you. If they're unsuccessful, they may choose to sue, which can result in wage garnishment or a lien on your home or other assets.
Mortgage
Not paying your mortgage is one of the easiest ways to lose your home.
A mortgage lender can consider your loan default after just 30 days of non-payment. And after 120 days, they can begin the foreclosure process to seize your home.
Besides depriving you of a place to live, a foreclosure will wreck your credit and stay on your reports for seven years.
Personal loan
If you've been delinquent for at least 30 days, your personal loan can go into default.
Most personal loans are unsecured, so the process will be similar to defaulting on an (unsecured) credit card. The lender is likely to sell your debt to collections, and the collection agency can choose to pursue legal action if you don't pay the debt.
If you default on a secured personal loan, the lender can repossess the asset you have put up as collateral.
Student loans
Defaulting on student loans can have major repercussions.
Student loans go into default after 270 days of past-due payments. The consequences may include withheld tax refunds and garnished wages, garnishment of a portion of Social Security benefits and ineligibility for any additional federal student aid.
As for private student loans, the lender determines when your loan is in default. What happens after also depends on the lender, but you can usually expect them to sell your debt to collections.
Auto loans
A car loan is a secured loan, and your car serves as collateral. You can default on a car loan after 30 days of non-payment. If that happens, the lender may repossess the vehicle.
Further, you may still owe the money even after losing your car. After repossession, the lender will sell your car at an auction. If it's sold for less than what you owe, you'll be responsible for paying the difference. Not to mention, repossession is a highly negative item to have on your credit report — and it will remain for seven years.
How to avoid a default
If staying on top of multiple loan payments has become a challenge, it can be a good idea to look into a debt consolidation loan. This will allow you to lump multiple balances into one loan, potentially with a lower interest rate. CNBC Select recommends Achieve if you have imperfect credit — this loan option features relatively low interest rates and flexible terms. Or, if your credit score is in good shape, look into LightStream, which charges no origination fees or late fees and offers loans of up to $100,000.
Achieve® Personal Loans
Annual Percentage Rate (APR)
8.99% to 35.99%
Loan purpose
Debt consolidation, major purchase
Loan amounts
$5,000 to $50,000
Terms
24 and 60 months
Credit needed
620 or higher
Origination fee
1.99% to 6.99%
Early payoff penalty
None
Late fee
See terms
Terms apply.
LightStream Personal Loans
Annual Percentage Rate (APR)
7.49% - 25.99%* APR with AutoPay
Loan purpose
Debt consolidation, home improvement, auto financing, medical expenses, and others
Loan amounts
$5,000 to $100,000
Terms
24 to 144 months* dependent on loan purpose
Credit needed
Good
Origination fee
None
Early payoff penalty
None
Late fee
None
Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.
Debt consolidation might help you gain control over your debts. However, before you go with this strategy, be honest with yourself. Will this truly help or simply avoid the inevitable?
If you have looked at your budget and realized you simply can afford your debt payments at the moment, talk to your lenders. Default isn't only bad news for you — it is for your creditors as well. Your mortgage lender will probably do their best to work with you to prevent foreclosure and your auto lender likely wants to avoid repossession, too. Get in touch with your lenders and issuers as soon as you can and be transparent. If you're experiencing financial hardship, you may be able to request deferment or forbearance, among other possible solutions.
Bottom line
Defaulting on a loan can wreak havoc on your credit and have long-lasting financial consequences, including asset loss, wage garnishment and more. If your debt is getting out of hand, debt consolidation might help you avoid defaulting on your loans. But if you think it won't offer much relief, contact your lenders or card issuers and discuss how you can work together to avoid defaulting. Like in any relationship, communication will be key.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best products.
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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
