What Does It Mean If Your Loans Go Into Default?

Loans are legal contracts between debtors and creditors. By signing, the debtor agrees to pay a certain amount to the creditor per month until the loan is paid off. If the debtor does not pay as agreed, he is considered to have defaulted on the loan. Default has serious consequences for your credit, and in some cases can interfere with other areas of your life. Always contact your creditor immediately if you are having financial trouble so you can make payment arrangements rather than going into default.



If you do not make a loan payment on the date you agreed to when you signed the loan papers, your loan is in default. Many creditors give borrowers a grace period before officially declaring default. For example, student loan companies may give you up to 120 days to bring your loan current or make payment arrangements before taking collection action. If your loan is in default, your creditor can close your account and begin collection proceedings against you.


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Going into default can have serious consequences for your credit. Most types of default stay on your credit for five to seven years, depending on your state's laws. In addition, if the debt was secured by property (a home loan or vehicle loan), the creditor can take action to reclaim and resell the property. Creditors who extended unsecured debt to you can sue you and request the court garnish your wages to pay back the debt.


Student Loans

If you do not make payments on your student loans within 270 days of the loan becoming due, you will go into default. Defaulting on student loans is especially problematic because these loans are for large sums of money and because your creditor is the federal government. If you default on your student loans, the default remains on your credit for seven years. In addition, the federal government may seize your income tax refunds or any Social Security benefit payments. The government can also garnish up to 15 percent of your wages. You cannot receive any further federal financial aid, can be barred from entering the Armed Forces and in some cases will not be able to renew a professional license until you repay your student loans in full.



In most cases, mortgage lenders consider the debtor to have gone into default if he hasn't made a mortgage payment in 90 days. However, mortgage lenders can begin foreclosure proceedings if the borrower misses even one payment, so it is best to contact the lender immediately if you are having financial trouble. Once the borrower goes into default, the lender goes to court to get permission to seize and resell the property. This is called foreclosure. Borrowers may be able to avoid foreclosure by making payment arrangements with the lender or by selling the house to cover the cost of the mortgage.