What Does it Mean to Default on a Loan?

Calculator with money

When you take out a loan, you agree to repay that loan over a certain period of time. But things happen, and you may eventually find yourself missing payments. What does it mean to default on a loan? Loan default happens if your missed payments exceed the number that was agreed upon in your contract. Defaulted loans are usually sent to a debt collection agency that would then get in touch with you to collect your missed payments. If you’re worried about missing payments, the best immediate course of action to take is to contact your lender and discuss the matter with them honestly, as you may be able to create a new payment plan that would work better for your budget.

What Can Happen as a Result of Loan Default?

Unfortunately, loan default can have a lasting impact, appearing on credit checks for quite a while. One of the most significant ramifications is the damage it can do to your credit score that can take a while to bounce back from, as well as higher interest rates on any future loans you might apply for. If you have a secured loan (i.e. title loans and personal loans), which uses collateral as a backup, you run the risk of your lender seizing that collateral, be it your vehicle, your home, etc. If your loan is unsecured (i.e. credit cards and student loans), a common course of action following loan default is wage garnishment. In this case, your lender would get a court order to have a portion of your regular paychecks diverted to them until your debts are paid off.

Of course, none of these are pleasant outcomes, but that doesn’t stop life’s unexpected twists and turns from happening. To help yourself avoid loan default in the first place, let’s go over some helpful tips, below.

How to Avoid Defaulting on a Loan

  • Be open and honest about your situation. As we noted above, if you’re worried about missing payments and defaulting on your loan, your first action should be to contact your lender and discuss the possibility of restructuring your payments. If you’re upfront and honest with them, you’ll find that many lenders may be willing to work with you and avoid taking legal routes.
  • Have a clear understanding of your loan before signing the dotted line. Applying for a loan can be a stressful process, and it’s important to take the time from the very beginning to make sure you fully understand the payment terms and interest rate you’re agreeing to. This will help you avoid surprises later on, such as higher payments than you anticipated or not enough time to take care of them.
  • Only borrow what you absolutely need. It may sound obvious, but you should avoid borrowing more money than you really need. Do your homework beforehand to figure an exact budget, and don’t accept anything more if your lender offers.
  • Pay off what you can. Even if you’re not in a position to come up with your full payment, it will help your case if you put even a small amount of money toward it. This will put small dents in your debt, and your lender may be inspired to be more lenient with you if they see that you care.

Contact Xpress Cash for More Advice

Have additional questions surrounding the query “what does it mean to default on a loan?” Xpress Cash is here to help. Contact us online or stop by one of our locations in Michigan. Our financial experts have the advice you need!