Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: May 10, 2021

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Summary

  • Failure to pay back a loan within the agreed-upon time frame is known as a default
  • Defaulting on a loan can lead to financial penalties and can prevent you from qualifying for loans in the future
  • Contact your lender if you are having trouble paying back a loan so you can work out a payment plan

If you are looking for a one-stop guide to buying a home, a new car, or even going back to university, you’ll probably be taking out a loan from a bank to cover the initial costs of these investments.

Over time, you’ll have to pay the lender back (with interest), but life happens and sometimes you might miss a payment or two. But what happens if you fail to pay back the loan in the amount of time agreed upon with your lender?

When this happens, this is known as defaulting on a loan. What does it mean to default on a loan? Keep reading to learn what it means to default on a loan, what happens when you default on a loan, and how to avoid defaulting on a loan.

What does it mean to default on a loan? Before finding out, enter your ZIP code into our free comparison tool above to find affordable loans from lenders near you.

What happens when you default on a loan?

So what does default mean? When you default on a loan (default meaning fail to pay a loan back within the time frame agreed upon) you have essentially broken your lender’s trust in your ability to pay back your loan.

This comes with many unfavorable consequences. Defaulting on a loan can hugely lower your credit score, signaling to other lenders that you are an unreliable borrower and making it harder for you to qualify for another loan in the future.

Even worse, if you default on a loan your debt will only continue to grow as late fees and other penalties are added to your account, increasing the amount you have to pay back—not to mention the growing interest you’ll still be charged.

The worst-case scenario if you default on a loan? You could face garnished wages or even have your bank accounts frozen until you take steps to start repaying your loan. You likely won’t qualify for any more loans until you do.

In many cases, if you miss a payment or two you should be fine as long as you make up that payment within a few weeks or months. Make sure to consult your loan agreement to see at which point your loan is considered default.

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How do you avoid defaulting on a loan?

So now that you know the nasty consequences of defaulting on a loan, you’re probably wondering how to avoid defaulting on a loan in the first place.

Well, the first place you can start is by communicating with your lender. If you’re having financial difficulties, let your lender know and ask about any arrangements that can be made. You’d be surprised how accommodating some institutions can be.

If you’re struggling with student loan debt, look into the many relief options available to you. You may qualify for deferment, forbearance, or income-based payments that can make your loan more manageable.

You can even refinance your student loans to save money on interest. If you have a mortgage loan, you should also consider refinancing your home in order to lower your monthly payments. Learn how refinancing student loans digs borrowers out of debt.

Of course, the easiest way to avoid defaulting on a loan is to make your payments on time and in full. Doing so will not only save you the stress of defaulting but will also improve your credit score and help you secure loans in the future.

What does it mean to default on a loan? Now that this has been answered, enter your ZIP code into our free comparison tool below to find affordable loans from lenders in your area today.