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What does it mean to default on a loan?

What does it mean to default on a loan?

By: Anne East | 29th June 2020

It’s all too easy to default on a loan. But defaulting could have serious long-term consequences when it comes to getting credit in the future – here’s how.   

What does default mean?

Loan default is when you fail to pay back what you owe according to the terms and conditions in your loan agreement. Loan defaulting doesn’t just apply to things like personal loans and secured loans (like a mortgage). It also applies to utility bills and to credit card and store card repayments.

In most cases, you’re considered to have defaulted on a loan if you’ve consistently missed repayments over three to six months. However, that’s not always the case, and some lenders will consider just one missed payment as defaulting.

The contract between you and your lender should make clear what is considered to be defaulting on a loan.

How bad is it to default on a loan?

From a financial perspective, defaulting on a loan is not good. It can have a long-term impact on your ability to borrow money. In other words, it means you could struggle to get a loan, a credit card or even a mobile phone contract.

Defaulting on a loan is a big red flag for lenders. Not only does it show you’ve had problems meeting repayments, it implies you’re not great at managing money. Both of these issues can make creditors more reluctant to lend to you. Even if you find a lender willing to give you a loan, you might be charged a higher than advertised interest rate.

If you default on a loan, it stays on your credit report for six years from the date of default – even if you pay it off before the six years are up. Even if you don’t pay off the debt, it’s still removed from your credit report after six years.

Will I get a warning before a default?

Possibly. In some cases, your lender will send you something called a default notice (or notice of default). This will outline the payments you’ve missed and give you a date that you need to pay the outstanding amount by. If you do this, you can avoid defaulting and your credit report won’t be affected.

At this point, if you know you can’t pay back what you owe, it’s a good idea to contact your lender. They’ll try and work with you to agree an alternative repayment plan, although this is at their discretion. If that doesn’t work out, you can seek free advice from a debt charity such as StepChange.

Bear in mind that not all lenders will issue a default notice. Whether they do or not should be set out in the terms of your contract (another good reason to read the small print).

What happens after I default on a loan?

As well as appearing on your credit report, your lender can try to recoup their money in other ways. For example, they could:

Managing debt

Whether you’ve had to take a pay cut, lost your job or just been overwhelmed by bills, debt can quickly spiral out of control. So, if you’re in a situation where money worries are constantly on your mind, perhaps it’s time to do something about it.

For advice on where to turn, why not take a look at these six top sites for debt advice. And if your debt has been passed to a collection agency and you’ve already worked hard and paid off your debts (well done you), here are four things to do after paying off a collection agency.


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