Defaulting on a loan means failing to meet the legal obligations or conditions of a loan. This can happen when a borrower misses payments for a specified period of time. There are different types of default, including debt service default, technical default, illiquidity, insolvency, and bankruptcy. When a borrower defaults on a loan, several things can happen, including:
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Debt collection: The lender may send the loan to a debt collection agency to recover the money owed.
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Damage to credit score: Failure to meet payments on a mortgage, student loan, or personal loan will affect an individuals credit rating, their ability to secure future loans, and could result in the seizure of property or wages.
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Seizure of collateral: If a borrower defaults on a secured loan, such as a mortgage loan secured by a house or a business loan secured by a company's assets, the asset or collateral used to secure it would then be in jeopardy.
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Increased interest and fees: When a borrower defaults on a loan, it will take longer to finish paying off the loan, and for some loans, this can also mean paying more in interest overall.
It is important to note that defaulting on a federal student loan can have specific consequences, such as wage garnishment, tax refund offset, and loss of eligibility for future federal financial aid.
