What Is Loan Default?
It is the inability to repay a debt on a loan or security, including interest and principal. When a borrower is unable to make timely payments, misses payments, or avoids or ceases making payments, the borrower is said to default. Individuals, businesses, and even countries can default on their loan obligations if they cannot meet them, and creditors frequently estimate default risks months in advance.
There are two types of loans, secured loans and unsecured loans. The secured debt requires collateral like houses, cars, fixed assets, and they are usually easy to get.
Unsecured loans are loans that don’t need collateral. They are harder to get.
A secured loan, such as a mortgage secured by a home or a business loan secured by a company’s assets, might default. If you don’t make your mortgage payments on time, the loan may default. Similarly, if a company issues bonds (basically borrowing money from investors) and cannot fulfill coupon payments to bondholders, the company is in default.
Loan defaults on an unsecured loan, such as a credit card loan, can also happen. Loan default hurts the borrower’s credit.
Loan default can have several implications, including poorer credit scores, a worse probability of obtaining credit in the future, and higher interest rates on existing loans.
Loan Default Example
In a secured loan, the lender has some level of confidence in gaining back his money.
An example of a secured loan is a mortgage loan; when you take a mortgage loan, if you finally default, your creditor can decide to take your house and use it to recoup the loan defaulted.
Unsecured loans are not too easy to get compared to secured loans. Examples of these loans are credit card loans, medical or health loans, and student loans. If there is a default on an unsecured loan, like a credit card loan, the creditor involved might decide to sell off the credit card to another agency, and the debtor would have to pay back the money to the agency.
What to do
The best thing for a debtor to do is if he sees that they are about to default. The debtor should contact the creditors of they can grant an extension.« Back to Glossary Index