Default
Failure to repay a debt as the loan agreement requires, typically after a period of missed payments, triggering serious consequences.
What it means
A loan becomes delinquent the day a payment is missed; default is the more serious stage defined in the loan contract or by law. The timing varies: many lenders treat a loan as defaulted after several months of missed payments, and most federal student loans default after about 270 days of nonpayment.
Consequences depend on the debt. Lenders can foreclose on a home, repossess a car, send unsecured debt to collections or sue. For federal student loans, the government can garnish wages and seize tax refunds without a lawsuit. Late payments and defaults can remain on credit reports for up to seven years, lowering credit scores and raising future borrowing costs.
Example
Suppose a borrower stops paying a $12,000 personal loan. After several missed payments the lender declares a default, charges off the account and sells it to a collection agency, and the delinquency stays on the credit report for years.
How it’s used
- Understanding what happens after missed payments
- Weighing options such as hardship plans or forbearance
- Reading a loan agreement’s default terms
Good to know
- Contacting the lender early, before default, often opens up more options, such as hardship plans or modified payments.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.