In a Nutshell
When you don’t make your loan payments on time, your account can go into default, and your lender may take steps to recover its losses. The good news is there are actions you can take if you’re having trouble making payments, including reaching out to your lender to ask about temporarily suspending your payments, extending the term of your loan or reducing your interest rate.Defaulting on a loan means you’ve missed one or more payments on an account for a certain amount of time.
If you have a loan in default or are worried you may default, we’ll help you understand how a loan default can affect your finances — and what you can do to improve your situation.
Let’s look at a few common types of loan default situations and go over your options for each scenario.
Auto loan default
Here’s what it means to default on an auto loan and how to get back on track if you do.
What happens if you default on your auto loan?
In many states, you’re considered in default as soon as you miss a payment on an auto loan. And when you default, your lender may be able to repossess your car without notifying you. To make matters worse, you may also be responsible for paying the repossession costs.
If the car is sold after repossession, and it sells for less than what you owe on your auto loan, you might have to pay the difference, along with repossession fees. If you can’t pay that difference, your lender can send your account to a collection agency or take you to court, where a judge may order that your wages be garnished. When your wages are garnished, money from your paycheck or bank account is automatically withdrawn and given to one or more of your creditors.
On the flip side, if the car sells for more than what you owe on the loan, you’re entitled to the money that’s left over after the loan is paid off.
What can you do?
If you know you’re going to miss a payment on your auto loan, contact your lender right away — it may be able to help you get back on track by extending the repayment period or deferring missed payments to the end of the loan. Keep in mind that extending the loan term means you’ll pay more in interest over the course of the auto loan.
Student loan default
According to U.S. Department of Education data, of about 4.5 million students who entered into special student loan repayment programs in Fiscal Year 2016, 10.1% had defaulted by 2018 — that’s nearly half a million borrowers. So if you find yourself in a situation where you’re having trouble making a payment on your student loan, you’re not alone.
What happens if you default on your student loans?
If you have a private student loan, it will typically go into default if you miss your payments for 120 days. Federal student loans are considered to be in default after 270 days of missed payments.
Once a student loan goes into default, your lender can accelerate your loan — making your entire loan balance and interest due immediately. Your wages can be garnished, and unlike with other types of loans, the lender doesn’t need a court order to do so. Plus, the government can withhold your tax refunds and any federal benefit payments to repay the loan.
What can you do?
The good news is that federal student loans aren’t considered to be in default until your payment is at least 270 days late. This gives you plenty of time to work out an arrangement with your lender before your loan goes into default. When it comes to federal student loans, you have several options. Here are a few.
- Repayment plans: Federal student loans offer multiple repayment-plan options that can reduce your monthly payment.
- Deferment: Deferment temporarily suspends your payments. If your loan is subsidized, you don’t have to pay interest during a deferment. If it’s unsubsidized, you’ll still have to make payments on the interest that accrues during the deferment period.
- Forbearance: Similar to a deferment, you don’t have to make your loan payments for a period of time. You’re responsible for making payments on the interest that accrues even if your loan is subsidized.
- Consolidation: If you have more than one student loan, you may be able to consolidate them into a single loan with a fixed interest rate. This rate is based on the average interest rate of the loans being consolidated.
- Loan forgiveness: You may qualify for loan forgiveness under the Public Service Loan Forgiveness Program if you work for a nonprofit or government agency and have made at least 120 qualifying loan payments.
If you have private student loans and can’t make your payments, you’ll likely go into default sooner — usually around 120 days of missing payments. Unlike with federal student loans, private student loans don’t have standard payment-assistance programs. But some lenders may offer deferment, forbearance or consolidation options. Contact your lender directly to find out what’s available.
Mortgage default
Home ownership is a dream for many Americans, but financial difficulties can make it tough to keep up with mortgage payments. Here’s what you need to know if you find yourself in a difficult financial situation.
What happens if you default on your mortgage?
The length of time it takes for a mortgage to be considered in default varies by lender. But 30 days after a missed payment, your lender will typically reach out and ask for payment. Once a payment is 120 days late, the lender may move forward with a foreclosure.
If you default on your mortgage, you not only risk losing your home, but you could also be responsible for paying hundreds or even thousands of dollars in late and default-related fees such as property inspections, maintenance fees and foreclosure costs.
Plus, if your lender forecloses on your home and sells it for less than the outstanding loan balance, you may have to pay the difference between the amount you owe on your mortgage and the amount the house sells for.
What can you do?
There’s hope if you’re struggling to make your mortgage payments. Lenders are often willing to work with you to develop a solution that will allow you to stay in your home. They may offer loan modifications that permanently change the terms of your loan to lower your monthly payment, including lowering your interest rate, extending the repayment period or reducing the balance on your loan.
If you’re not eligible for a loan modification, you may qualify for forbearance, which temporarily suspends or reduces your monthly payment during a hardship. Contact your mortgage lender to find out about your options.
Personal loan default
The consequences of defaulting on a personal loan vary based on whether you have a secured or unsecured loan.
What are the consequences of defaulting on a personal loan?
Regardless of the loan type, if you miss a payment, you’ll usually be charged a late fee on top of what you owe. Once you’re 30 days late, the lender will report your late payment to the three major consumer credit bureaus. Depending on your state and the loan terms, your loan may be considered in default in as few as 30 days or up to 90 days.
If you default on a secured loan, your lender typically has the right to seize the asset being used as collateral, such as money in a savings account or a CD, as payment for the loan.
If your loan is unsecured, the lender may send your account to a collection agency or take you to court, where your wages could be garnished or a judgment could be issued to seize your property to pay off your loan.
What can you do?
Contact your personal-loan issuer and explain your situation. Your lender may be willing to reduce your interest rate, extend your repayment period or offer you forbearance.
Next steps
If you’re struggling to repay a loan, we recommend taking action now, if you can. Here are some steps you can take before your loan goes into default.
- Contact your lender as soon as possible. Communication is key. Your lender may be able to work with you to make your payments more affordable and prevent bigger financial problems down the road.
- Work with a credit counselor. A credit counselor could help you complete a review of your finances and provide you with financial education tools. You can find a list of approved credit counseling agencies by state and judicial district on the U.S. Department of Justice website.
- Consider a debt settlement service that can work with you to negotiate paying back your debt.