What happens if you default on a loan

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By CreditNinja
Modified on January 19, 2024

If you default on a loan you can usually expect that it will be sent to collections. This means that the lender sells the debt to a collection agency, and now they will be reaching out to recoup the funds. Defaulting can negatively affect your credit score, which may make it difficult to be approved for new loans in the future. 

The word default simply means that you failed to make payments on your loan and that you didn’t fulfill your obligations in the loan agreement. Usually, you will have plenty of warnings before a loan goes into default. If you accidentally miss a payment you might face a late-payment fee, but your loan probably won’t go into default from one missed payment.

Once your loan goes into default, the lender usually proceeds with selling the debt. Collection agencies are companies that buy debts from lenders, then seek out the borrower to recover the money. At this point, the lender is out of the equation, and you now owe the money directly to the collection agency. 

The most important thing to know about having a loan in collections is that you can negotiate with the agency. For instance, let’s say you owed $1,000 on your loan. Now that the debt is owned by the collection agency you can attempt to negotiate a payoff amount that is lower than the $1,000. Maybe they would be willing to close the debt with a payment of only $750. This will depend on the specific collection agency, and whether they’re willing to work with you. But it is possible. 

That being said, you should never wait for a loan to go into collections simply to try to negotiate a lower payoff amount. Having a loan default, or a loan in collections can drastically lower your credit score. This will tell future lenders that you’re not a trustworthy borrower. And it may prevent you from being approved for loans in the future. 

Be very careful and make sure to always make your payments on time to avoid these situations. Having your credit score lowered could affect your finances for years to come.

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