Paying your loans on time is essential to avoid late fees, credit score decreases, and account issues. However, life can be unpredictable, and you may find yourself struggling to keep up with monthly payments. Loan delinquency and default are possible when a borrower falls behind on payments.
If you’re confused about these terms, that’s okay! Keep reading to learn the difference between loan delinquency and default and how to avoid future missed payments.
What Is Loan Delinquency?
Loan delinquency occurs when the loan is past due. Suppose you fail to pay your loan by the due date. In that case, you have a delinquent account until you make the monthly payment or arrange an alternative solution with the lender. For example, if you cannot pay your student loan this month, you can ask your lender for a deferment or forbearance.
The best way to avoid delinquency is to make monthly payments on time. Talk to your lender about potential solutions if you know you will miss a payment ahead of time. If your account remains delinquent and you miss several payments in a row, you can default on your loan. The good news is that the delinquency period is similar to a grace period. You may have ample time to talk to your lender and come up with the missing funds before defaulting.
What Is Default?
Default occurs when a borrower stops making payments on their loan. When an account stays delinquent, it will eventually go into default. When a loan defaults, the financial institution will inevitably send the debt to a debt collection agency. A debt collector working for a collection agency will contact you and attempt to recoup the entire loan balance.
The number of missed payments required to go into default depends on the type of loan you have and the lender. If you have more than one missed payment, talk to your lender to learn how many missed payments result in default.
How Many Missed Payments Result in Loan Delinquency and Default?
The number of missed payments that lead to delinquency or default depends on your loan type and the financial institution. Below are a few examples of standard loans and the average number of payments you can miss before your credit history gets affected.
Federal Student Loans
Student loan delinquency occurs after the first missed payment on federal loans. Suppose your account remains delinquent for more than 90 days. In that case, the loan provider will report your delinquency to one of the three major credit bureaus.
Have you obtained a loan through the William D. Ford Federal Direct Loan Program or Federal Family Education Loan Program? In that case, your loan will default if you don’t make payments within 270 days. And if you got a student loan through the Federal Perkins Loan Program, that loan defaults if you fail to pay by the due date.
Mortgage Loans
You can default on a mortgage loan as soon as the first missed payment. If you fail to make a payment within 30 days, your mortgage loan can typically default. Mortgage lenders usually start foreclosure on a delinquent loan after three to six months of missed payments.
Unsecured Loans
Delinquency on an unsecured loan happens after you miss one monthly payment. But default on an unsecured loan typically occurs after 30 to 90 days of late loan payments. Lenders send defaulted loans to debt collection agencies. You may have to appear in court in the event of a lawsuit. The debt collector can garnish your wages if the court judgment is in the creditor’s favor.
Auto Loans
Many auto loan lenders only provide a 30-day grace period before the auto loan defaults. Since you used collateral to secure the auto loan, you can lose your car! Once you default on an auto loan, the lender can repossess your vehicle and sell it at auction to recoup the remaining loan balance.
Credit Cards
Typically credit card companies consider a loan in default after six months of not making at least the minimum monthly payment. After defaulting on a loan, your credit card account may be sent to an internal collection department or sold to a debt collection agency.
How Does Loan Delinquency and Default Affect Your Credit?
Delinquency happens when you miss a monthly payment. Late loan payments will decrease your score by a few points and generally appear on your credit report after 30 days. Late payments can stay on a credit report for up to seven years.
Defaulting on your loan can drastically affect your credit score. Once you default on your loan, the financial institution will likely send your unpaid debt to collections, and your score will decrease by many points. A collection account will appear on your credit report, where it will remain for seven years.
Negative information on credit reports can continue to affect your score over the years. However, the impact will lessen as time goes on. Once late payments and collection accounts fall off after seven years, you can have a fresh start! Your credit score can also increase once negative information drops off your credit file.
Unfortunately, you cannot remove negative information from your credit report before the allotted time frame. However, suppose there is incorrect information on one of your credit reports. In that case, you can file a dispute with the credit bureau. Filing a dispute does not affect your credit. Still, you may not get the information removed from your credit report if it is accurate.
How To Avoid Late Loan Payments
Late payments can wreak havoc on your FICO score and your finances. A late fee may not be substantial, but multiple late fees can put a noticeable dent in your wallet. If you have trouble paying your bills on time, don’t worry! There are various ways to organize your finances and stay on top of your financial accounts.
Sign Up for Automatic Payments
If you have not yet signed up for automatic payments, consider doing so! Auto payments deduct your monthly amount from your bank account automatically. You do not have to worry about missing a due date since charges are withdrawn automatically. Just ensure that you have sufficient money in your checking account by the payment date to avoid a non-sufficient funds fee (NSF).
Change Your Due Date
Many people struggle to pay loans and bills on time because the due date is a few days before their pay period. However, you can contact your lender to request a different due date! Changing the day your monthly payments are due can help you plan your finances and avoid missed payments.
Ask for a Deferment or Extension
A deferment allows you to stop making payments on student loans and mortgage loans temporarily. During the deferment period, usually lasting a few years, you don’t have to pay the principal amount or interest fees. Most lenders only offer deferment to borrowers experiencing financial hardship.
An extension, or grace period, is a short-term solution that allows you to skip one monthly payment without penalty. Extensions are typically given to borrowers that have loans with monthly installments, such as personal loans or installment loans. Review your loan agreement or talk to your lender to see if an extension is possible.
Consolidate Your Debt
If you have so many monthly bills that you repeatedly miss payments, consider consolidating your debt. Debt consolidation allows you to merge multiple credit card balances or loans into one account. This way, you pay one monthly bill instead of several! Consolidating debt can also help you save money by obtaining an affordable interest rate and extended repayment length.
Set Alerts and Reminders
Setting up alerts and reminders on your phone can help you prevent missed payments on your loans. Life can be hectic, and it’s easy to forget due dates until it’s too late. Setting up alerts on your phone’s calendar can help you avoid late payments and improve your payment history on credit reports.
The Bottom Line
Delinquency means a borrower fails to keep up with their monthly payments. Loan delinquency can negatively affect credit scores and appear on a credit report. Your loan can default if you don’t fix a delinquent account and continue to miss payments. Default loans typically go to collections, making it harder for you to borrow money in the future.
Luckily, there are several ways to prevent delinquency and default. Organizing your finances is the single best way to avoid missing payments. You can set up alerts or sign up for automatic payments to make the payment process more manageable. Establishing a budget plan can also help you maintain enough money in your bank account to pay all your bills.
The delinquency period varies per lender, but it typically offers enough time for you to catch up on payments. If you need additional time to come up with the money necessary to avoid default, ask your lender for a deferment or extension. Many financial institutions are willing to work with borrowers, so don’t be afraid to reach out and ask for financial assistance ahead of time.
References:
Student Loan Delinquency and Default│Federal Student Aid
Does Your Credit Score Go Up When a Default Is Removed?│Experian
