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What Is Default And How Does It Affect My Credit Score?
Peter Kenny
In simple terms, a loan default is when you have not made your
agreed upon loan payments to the lender. There can be any number
of reasons why a consumer may not have made payments, but once a
certain period of time has elapsed, that non-payment record will
become a part of the consumer's credit history. Once it becomes
a part of the credit history (or credit record) it is available
to be used during the formulation of the consumer's credit score.
Default can occur with any type of loan. Student loans, home
loans, auto, SBA, 401k, and payday loans are all susceptible to
loan default. One of the most common loans where default happens
is with credit cards.
Consumers should understand that default is not the same as
deferment. A deferment is a plan in which the payment is
postponed by mutual agreement between the lender and the
borrower. There are many types of deferment programs and plans
available for consumers, and those who are in danger of
defaulting on a loan should look into a deferment before the
default actually happens.
In general, lenders prefer to see a deferment rather than a
default on a consumer's credit record. A deferment tells the
lender that you are at least willing to make the payment, even
if the payment is late. Default, on the other hand, signifies to
the lender that there is a far deeper problem with the
consumer's finances.
Once a default is posted to a consumer's credit record or credit
history it stays on file for up to seven years. Because of this
long period of time, it is important for all consumers to avoid
defaulting on a loan whenever it is possible.
One of the best ways to reduce the possible repercussions of a
default is to contact the lender as soon as possible. If you are
looking at missing just one or two payments, the lender may be
able (and willing) to work some type of payment plan out with
you. Most lenders are willing to do this because it is easier
and more cost effective to work with a consumer than it is to
foreclose on a home or repossess a car.
If your financial problems are going to more long term you may
want to look into contacting a debt repayment agency. These are
consumer credit agencies that work with you and the lender to
make arrangements for alternative payment plans. In general,
once a repayment plan has been approved by the lender, the
consumer puts money into an account with the debt repayment
agency and the agency makes the payments for the consumer. There
are often restrictions associated with these plans such as the
consumer agreeing to not take on any more debt while the plan is
in effect, but these restrictions are usually for the good of
the consumer rather than being punitive.
Whenever possible, consumers should do whatever they can to
avoid default on a loan. A default will normally cause far more
problems than the solution, even if the solution is to severely
restrict the spending that takes place at home for a while.
About the author:
Peter Kenny is a writer for The Thrifty Scot, please visit us at
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