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What Does it Mean to Default on a Loan?

What Does it Mean to Default on a Loan?

Defaulting describes what happens when a borrower who has a loan in repayment fails to make payments over a specific period of time. Defaulting on a loan can have a significant impact on your financial record and seriously impact your credit score. It may also come with legal implications, so it is important to make timely payments in order to avoid defaulting on a loan.

If you do default, you must take action right away to correct the mistake to avoid long-term consequences to your finances.

For example, if Tricia goes to the bank for a $1,000 loan to pay for moving expenses as she switches apartments following a job change, but she stops making payments on the loan, it may go into default and result in calls from collections agencies, and additional fees can be added to the debt and interest she is still accruing.

Personal loans are not usually considered “secured” loans, meaning collateral such as a home is not at stake if default occurs. So, if a person defaults on a secured loan, they could lose their home in foreclosure or have their vehicle repossessed. This does not happen with personal loans, but outcomes resulting from defaulting on a personal loan can still be just as serious, so it’s important to make timely payments to your loans and understand the expectations to avoid problems.

Financial Terms and Definitions