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You may need to take out a loan to purchase a home or car, or to renovate your kitchen. While you have the best intentions to make your monthly loan payments, sometimes life gets in the way. All it takes is a job loss, a health issue, or an unexpected home repair, and before you know it, you’re behind on your payments.

You risk defaulting on your loan if you continue to miss your payments. This can cause damage to your credit score and make it challenging to borrow money in the future. To try and avoid these consequences, it’s important to avoid defaulting on your payments.

If you’re wondering, “What does it mean to default on a loan,” keep reading!

Loan default explained

If you forget to make a loan payment or miss your credit card payment, your account becomes delinquent. If you continue to miss your minimum payments, your account “defaults.” The exact time it takes before you default depends on the type of loan and the specific terms.

It’s possible to default on a secured loan, like your mortgage or home equity line of credit (HELOC), or an unsecured loan, such as a credit card or student loan.

What happens when you default on a loan?

Defaulting on a loan can significantly impact your credit score. Your credit score indicates how likely you are to repay your debt. When a lender reviews your credit report and sees you’ve defaulted on a loan, this can be a red flag. A default can stay on your credit report for up to seven years, making it more challenging to borrow money.

If you default on a secured loan, like your mortgage or HELOC, you risk losing your house or other collateral.

Defaulting on an unsecured loan, such as a credit card or personal loan, can result in a debt collector coming after you to try and get the money.

Types of loans and their default penalties

Since payment history accounts for the largest portion of your FICO® credit score at 35%, missing multiple payments on any type of loan can negatively impact your credit score.¹ The other penalties associated with loan default can vary based on the type of loan.

Below are some common types of loans and the penalties you can expect if you default.

  • Mortgage: If you default on your mortgage, you risk foreclosure.² Your mortgage can go into default after one missed payment, and the foreclosure process can start after you are behind on your payments for 120 days.³ At this point, your lender can move ahead with the foreclosure process to recoup the money. If your lender sells your house and doesn’t make enough to cover your loan, they might pursue action to make you pay for the difference. Whether or not your lender can do this depends on the state you live in.
  • Student loan: With federal student loans, your loan will go into default if you don’t pay for 270 days (nine months).⁴ Once your student loan is in default, you risk wage garnishment, losing your tax refund or Social Security check, and a lower credit score. With private student loans, it’s up to the lender to decide when your loan goes into default, but once it does, your debt is typically transferred to a debt collector.
  • Auto loan: Failing to make your car payment on time can result in the lender repossessing your vehicle.⁵ Your lender will decide to keep or resell it to try and recoup their money. You may have to pay the difference if there’s a gap between what you owe for the vehicle and what the lender gets for selling it. You might also be on the hook to pay any fees associated with the repossession of your vehicle or termination of your lease.
  • Secured loan: Besides your mortgage or auto loan, other secured loans include a HELOC or a personal loan. If you miss a few payments, your lender can repossess and sell the collateral. You may have to pay the difference if they don’t make enough to cover the loan.
  • Credit card: If you miss a credit card payment for 180 days ( six months), your account goes into default.⁶ At this point, your account is typically closed and charged off. This doesn’t mean you’re off the hook. You’re still responsible for your debt however your lender might transfer it to a debt buyer or collector.
  • Unsecured loan: Defaulting on an unsecured personal loan can result in your lender garnishing your wages or benefits to try and recoup their money. You might also be on the hook to pay any interest, fees, or costs associated with the collection.⁷ Federal and state laws determine the limits on how much a creditor can garnish your wages. Before taking these actions, your lender typically needs to receive a court-issued judgment stating they can.

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4 Tips to avoid defaulting on a loan

To avoid the consequences associated with defaulting on a loan, consider the following tips:

  • Make a budget. Before you take on new debt, spend some time creating a budget or reviewing your current budget to ensure you can afford your repayments. You can also work on starting or growing an emergency fund, so you have something to fall back on during tough times.
  • Automate loan payments. Setting up automated payments can help you avoid forgetting a payment. You can check with your lender to see if they allow autopay as an option.
  • Contact your lender. Your lender also doesn’t want you to default on your loan. If you fail to make a payment or know you can’t afford it, contact your lender as soon as possible to see if you can defer or restructure your repayments. Forbearance is another option that allows you to pause your payments or make smaller payments.
  • Consider debt consolidation. Debt consolidation allows you to roll multiple debts into one loan or a 0% balance transfer credit card. This can simplify the repayment process and reduce the likelihood of forgetting to pay your bill. Ideally, you want to find a debt consolidation loan with a lower interest rate than you’re currently paying. This can help lower your monthly payments and save money over time.

Recovering from a loan default

Recovering from a loan default is a long process, but with time and effort, it’s possible. To begin, review your current financial situation. How much debt do you owe? What can you realistically afford to pay each month? You can contact your lender to see if you can set up a new repayment plan.

You can also work with a credit counselor to improve your financial knowledge and debt management skills to prevent similar issues in the future.

Finally, to increase your chances of borrowing money in the future, work on repairing your credit score. Focus on making all future payments on time.

Protect yourself against loan default

While you want to do everything you can to avoid credit card or loan default, know that you can recover if it happens to you. Keeping close track of your debt and automating your monthly payments are simple ways to avoid default and damage to your credit score.

Find out how to manage your bills and pay them on time.

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¹ FICO® Scores are developed by Fair Isaac Corporation. The FICO Score provided by ConsumerInfo.com, Inc., also referred to as Experian Consumer Services ("ECS"), in Experian CreditWorks℠, Credit Tracker℠ and/or your free Experian membership (as applicable) is based on FICO Score 8, unless otherwise noted. Many but not all lenders use FICO Score 8. In addition to the FICO Score 8, ECS may offer and provide other base or industry-specific FICO Scores (such as FICO Auto Scores and FICO Bankcard Scores). The other FICO Scores made available are calculated from versions of the base and industry-specific FICO Score models. There are many different credit scoring models that can give a different assessment of your credit rating and relative risk (risk of default) for the same credit report. Your lender or insurer may use a different FICO Score than FICO Score 8 or such other base or industry-specific FICO Score, or another type of credit score altogether. Just remember that your credit rating is often the same even if the number is not. For some consumers, however, the credit rating of FICO Score 8 (or other FICO Score) could vary from the score used by your lender. The statement that "90% of top lenders use FICO Scores" is based on a third-party study of all versions of FICO Scores sold to lenders, including but not limited to scores based on FICO Score 8. Base FICO Scores (including the FICO Score 8) range from 300 to 850. Industry-specific FICO Scores range from 250-900. Higher scores represent a greater likelihood that you'll pay back your debts so you are viewed as being a lower credit risk to lenders. A lower FICO Score indicates to lenders that you may be a higher credit risk. There are three different major credit reporting agencies — the Experian credit bureau, TransUnion® and Equifax® — that maintain a record of your credit history known as your credit report. Your FICO Score is based on the information in your credit report at the time it is requested. Your credit report information can vary from agency to agency because some lenders report your credit history to only one or two of the agencies. So your FICO Score can vary if the information they have on file for you is different. Since the information in your report can change over time, your FICO Score may also change. Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn More

² Information from Federal Trade Commission, "Your rights when paying your mortgage," as of January 27, 2024: https://consumer.ftc.gov/articles/your-rights-when-paying-your-mortgage#Missing

³ Information from Consumer Financial Protection Bureau, "I can't make my mortgage payments. How long will it take before I'll face foreclosure?"as of January 27, 2024: https://www.consumerfinance.gov/ask-cfpb/i-cant-make-my-mortgage-payments-how-long-will-it-take-before-ill-face-foreclosure-en-1849/

⁴ Information from Consumer Financial Protection Bureau (CFPB), "What happens if I default on a federal student loan?" as of January 27, 2024: https://www.consumerfinance.gov/ask-cfpb/what-happens-if-i-default-on-a-federal-student-loan-en-663/.

⁵ Information from Federal Trade Commission, "Vehicle Repossession," as of January 27, 2024: https://consumer.ftc.gov/articles/vehicle-repossession

⁶ Information from Consumer Financial Protection Bureau, "Credit Card Penalty Fees," as of January 31, 2024. https://files.consumerfinance.gov/f/documents/cfpb_credit-card-penalty-fees-nprm_2023-01.pdf

⁷ Consumer Financial Protection Bureau, "Can a debt collector take or garnish my wages or benefits?" as of January 27, 2024: https://www.consumerfinance.gov/ask-cfpb/can-a-debt-collector-take-or-garnish-my-wages-or-benefits-en-1439/

* To apply for Credit Builder, you must have received a single qualifying direct deposit of $200 or more to your Chime Checking Account. The qualifying direct deposit must be from your employer, payroll provider, gig economy payer, or benefits payer by Automated Clearing House (ACH) deposit OR Original Credit Transaction (OCT). Bank ACH transfers, Pay Anyone transfers, verification or trial deposits from financial institutions, peer-to-peer transfers from services such as PayPal, Cash App, or Venmo, mobile check deposits, cash loads or deposits, one-time direct deposits, such as tax refunds and other similar transactions, and any deposit to which Chime deems to not be a qualifying direct deposit are not qualifying direct deposits.

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