What is a Default?

When you default something, it means you have failed to make repayments. Defaults can have severe negative impacts on your credit score, which is important for obtaining loans and other forms of credit. Defaults are often preventable with careful planning, and when all else fails, negotiating with your credit lending agency.

Failing to make repayments

There are two general levels of failing to make repayments. You could fall behind on a repayment, perhaps missing a month or two of due payments. This is sometimes referred to as “falling behind” on payments. Perhaps you have a financial emergency and are unable to make a credit card repayment but a month or two later are able to resume repayments. Falling behind on repayments will hurt your credit score but will not necessarily lead to a default.

If you are falling behind on your payments you should contact your lender immediately before you fall into default. Often times, lenders will work with you to reduce payments for a short period of time so that you can get back on your feet and resume full payments. It is in a lender’s interest to work with you and resolve the issue so you may find yourself pleasantly surprised by their willingness to help.

Defaults

A default essentially occurs when a bank or lender determines that you are not able to, or have no intention of, ever repaying the loan, regardless of whether it is as small as vehicle loans, or something as big as caveat loans. The terms for default vary from lender to lender and loan to loan, but a common measure used is six months of non-payment for a particular loan. While six months may seem like a long time, do not underestimate how quickly that time can add up.

Defaults can seriously damage your credit score, and often result in a legal case being filed against you. A default may appear on your credit report for five years or more and could result in you being unable to obtain loans or credit. If no settlement can be reached outside of court, your lender may pursue legal action against you and try to force you to make payments. There is even a possibility that a portion of your wages will be seized and given to your lender. In some cases such as Australian caveat loans, the security you have against the loan may get repossessed, along with receiving a default on your credit score.

Working with your lender

Often, however, lenders will try to work with you and work to avoid going to court. This is especially true if you have a long relationship with a lender. First, legal fees for court battles can be expensive and the outcome is always uncertain. Second, believe it or not your lender values you as a customer and would prefer to work with you rather than forcing you to make a payment.

As such you should contact your lender and request to speak to the appropriate staff. As already mentioned many lenders will allow you to make partial payments in order to avoid default. And many banks also have programs that can assist you if you have fallen into default or are on the verge of doing so. Policy will vary from bank-to-bank so you will have to contact your particular lender.

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