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What is a Defaulted Loan?

A defaulted loan on someone’s credit history can hinder their ability to get more credit in the future.
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  • Written By: Garry Crystal
  • Edited By: Niki Foster
  • Last Modified Date: 13 October 2014
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When you take out credit or a loan with a lender, there will be a repayment plan set in place. The repayment terms detail when money is to be paid back to the lender, usually monthly or weekly. If you miss these payments, then the lender may class the credit or loan as a defaulted loan.

A defaulted loan status can have serious effects on your chance to gain credit in the future. It can give you an adverse credit history and can lower your credit rating and score. Financial establishments use these ratings to assess whether you will be a good enough risk to warrant them lending you credit.

There are a number of options available to you if you have received a defaulted loan notification. Do not just ignore these notices; the longer you leave them, the worse the situation will become. In some cases, repossession of goods can occur, and in some countries, non-payment of debts can be a prisonable offence. Think of a defaulted loan notice as warning sign that it is not too late to change the situation.

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When you receive a defaulted loan notice, the lender may give you the option of a repayment plan. You should contact your lender and negotiate a time scale when the arrears on your debt can be paid off. You should also negotiate a repayment amount that you can reasonably live with. It is not in your lender's best interest to obtain court proceedings, as this will cost them time and money to pursue.

Another option to pursue when you receive a defaulted loan notice is to obtain advice from a debt counseling service. They will be able to contact lenders for you and arrange a repayment plan that may include a halt to interest payments for a time. They may also be able to negotiate on your behalf lower repayments for your debts.

Debt counseling services can also advise on consolidation. If you have a number of debts that you are finding difficult to repay, this may be an option for you. You will need to give the debt counselor all your financial information, and they will assess whether consolidation is an option for you. You will pay the counseling service a lump sum every month, and they will pay your debts for you, usually after they have negotiated a lower term of repayment.

A defaulted loan notice should not be ignored. It should be looked on as the first step in getting to grips with any debt problems you may have. A defaulted loan may have already harmed your credit score, but if repayment terms are adhered to, the situation can be reversed.

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NewsGuru
Post 4

italy12- Yes, federal student loans can go into default if you do not pay your minimum payment each month. Generally, federal student loans go into default if you do not make payments for one year.

There are a few programs to help you if you cannot pay for your student loans. The government has started a program that allows your monthly payment to be adjusted according to your income. Therefore, if you do not make very much money your loan payment will not be as large as someone who makes more money.

However, keep in mind that if your monthly payments are very small it will take you longer to pay off the loan. The longer you take to pay off your loan the more interest you will accrue. This interest will end up costing you more in the long run.

italy12
Post 3

Is it possible for federal Stafford and Perkins student loans to default?

beachgirl05
Post 2

anon12938- I would think that in this unstable economy that it would not be a very good idea to start a home-based business buying defaulted loans.

If you buy defaulted loans, there is no way of guaranteeing that you will actually be able to pay for the loan once you buy it. You could be stuck paying for a large loan if your business fails.

anon12938
Post 1

I received some information about how to start a home-based business buying defaulted loans? Is this a good field to work in?

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