Lesson 11: What Happens If You Don’t Repay a Loan
In this lesson you’ll learn about the consequences of missing loan or credit card payments. We’ll tell you what to do to keep things from getting too serious, and we’ll give you tips so your credit doesn’t take too much of a hit.
With missed payments there are two phases: delinquency and default. Delinquency means that your payment is overdue, and each type of debt may have a different length of time before your name and information is sent to a reporting agency.
The number of days you have until you enter default also varies, but what default means is that the lender figures you won’t be paying them back. They sell your debt to a collection agency who will try to get the money from you.
The consequences for delinquency and default also vary depending on the type of loan you have. For most credit cards, being a few days late with a payment just costs a late fee and some interest. Your delinquency won’t be reported until you’ve missed the payment for the second billing cycle, so over 30 days. At this point, you probably won’t be able to use the credit card, and by 180 days, you’ll be in default.
For student loans, you’ll be reported as “delinquent” on your loan if you are 45 days late for private loans, and 90 days late for federal loans. If you still don’t pay your federal loans, after 270 days you’ll be in default and the government can garnish your tax refunds and wages.
For other types of loans, like car loans, you’ll have to look at the papers you signed. At a minimum, you’ll likely have to pay a late fee and your interest rate may increase. Once you’re officially in default, the lender may be able to repossess your car. Similarly, lenders can foreclose on your home mortgage, and this means that they kick you out of the house and sell it to try to recover their investment.
Late payments, delinquencies, and defaults will stay on your credit report for seven years. Lenders may focus on recent history, but an actual default will always be a red flag, so future borrowing will be very expensive.
If you have any sort of credit, take some time now to learn what options you have. Look over the fine print on your bills, and learn about your rights as a borrower.
If you anticipate money problems, consider calling a credit counselor, and the Consumer Financial Protection Bureau is a good place to start.