What Happens When You Miss a Payment or Default on a Loan?
Your credit score and credit history are important for many reasons, but this is especially true when it comes to applying for additional credit or loans. If your credit history is riddled with missed payments or defaulted loans, you’ll find it challenging to be approved for competitive interest rates and terms for any future loans or credit cards you apply for — that is if you’re approved at all.
And the worst part is that the consequences of missing payments or defaulting can negatively affect your credit for up to seven years. Being aware of what happens when you miss a payment or default on a loan can help you to be smarter with your finances. Here’s what you should know.
What Happens If You Miss a Payment or Default on a Loan?
“If you miss a payment or make a late payment on a loan, you might be subject to penalties and fees,” said Josh Zimmelman, managing director of Westwood Tax & Consulting. “However, most lenders allow a grace period after missing one payment.
“However, if repayments aren’t made for a certain period of time (the delinquency period), the loan will default. When a loan defaults, it is sent to an agency who will contact you to receive the funds. Defaulting on a loan can drastically lower your credit score and hurt your chances of receiving future loans or other credit. If you let it go too long, they may even be able to seize your wages or personal property to pay off the debts.”
The exact chain of events that will occur depends on the type of loan you miss a payment or default on. Here are some examples of different types of loans and their consequences.
Mortgage Loans
“When you miss one payment, you can expect a late fee, starting at around 3%,” said Andrina Valdes, COO of Cornerstone Home Lending, Inc. “Default describes falling behind on your payments. Typically, a loan won’t go into foreclosure until payments are over four months (120 days) past due.”
Federal Student Loans
“Federal student loans have longer delinquency period than other types of loans,” said Anna Serio, lending expert and certified commercial loan expert with Finder. “Your servicer won’t report your loan as delinquent until 90 days after missing a payment. Federal student loans also don’t go into default until you miss payments by 270 days.”
“The first thing that will take place is you will be considered ineligible for any future loans,” said Anthony Martin, CEO of Choice Mutual and Forbes Financial Council Member. “The second is acceleration, which is when the entire amount of your loan is considered overdue — something that could really get into financial trouble. You could rehabilitate your federal student loan and then work on repayment.”
Auto Loans
“An auto loan is in delinquency the day a payment is late,” said Omer Reiner, licensed realtor and president of FL Cash Home Buyers, LLC. “These could lead to the lender sending notices to the car owner and in most situations, there is a late fee. An auto loan is in default when the borrower is more than 30 days behind on payments. This can lead to an impact on credit score and repossession of the car without notice.”
Credit Cards
“A credit card loan can be in delinquency the first day a payment is late, but it can take up to 30 days for the credit card to be in delinquency,” Reiner said. “Late fees and a penalty APR may be applied to the credit card. It may take as much as 60 days for the credit card company to report the delinquency to the credit bureau. A default is when the borrower is more than six months behind on payments. The credit card company will close your account and sell the debt to a collections agency where the interest rates will be very large.”
Steps To Get Back on Track After Missing a Payment
While you may not be able to help missing a payment, it’s important to be proactive if you do and avoid allowing your loan to get to the default stage.
“First off, if you miss a payment — it happens to everyone — try to make that payment before the loan gets 30 days past due,” said Matt Sexton, a small-business finance analyst and writer at Fit Small Business. “If you can get your account current before it reaches 30 days late, it won’t be reported to the credit bureaus and won’t affect your credit score.
“If you are in a temporary financial crunch that might delay a payment or two, try to keep those delayed payments on as few accounts as possible. A payment late by 45 days on one account is better than 30 days late on three or four accounts. That will have a larger impact on your credit score.
“Especially with the ongoing pandemic, if things are getting tough financially, reach out to your lender. There are tools in place, payment extensions, for example, to help those struggling in the short term. If you have a long-time relationship with your lender, odds are they will try to find a way to help you to keep your credit solid.”
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