If you become delinquent on a personal loan, that means you are typically between 30-180 days late on your payments and will likely start being charged extra fees and having negative credit score impacts. If you have an auto loan, for example, you may become delinquent between 30-90 days, and a mortgage might be between 30-120 days. However, you can see that typically around day 30 is when you hit the delinquent point and are officially late on your payments. How long you remain in delinquent status before default, depends on the type of loan you have. It’s important to carefully review your loan agreement documents to understand when you are at risk for delinquency and default.

After the delinquency period ends is when your loan is considered “in default”. This means you are typically over 90 days past due and have failed to uphold the terms of their loan agreement. Depending on your loan type, you are now at risk of dealing with one or more of the following consequences:

1. Credit score damage—Once your credit score has been damaged it can take months or years to build it back up. Having a low credit score can impact your chances of getting a home loan, a credit card, a car loan, approved for an apartment, and so much more.
   
2. Increased fees and penalties— You have not defaulted on your debt yet, but you are delinquent at this point. Taking a loan and not paying it back on time can also result in extra fees and potentially being banned from that financial institution as well as others moving forward.
   
   
3. Debt collection and legal action—If you are unable to pay off your loan and default on your debt, your debt will eventually be sold to a debt collector, who will continue to contact you to pay-off your debt. If you still do not pay it off, you will likely have legal action pressed against you and must go to court to settle it. Your credit score is going to be hit hard for the next 7 years and will be difficult to fix, so avoiding this is very important.
   
   
4. Wage garnishment and asset seizure—Failing to pay back your loan can lead to lenders or debt collectors taking legal action. If a court rules in their favor, they could be given the right to seize your personal assets (like your vehicle). The court can also rule to have 25% of your payroll automatically taken and sent to pay off the debt.
   
   
5. Loss of collateral—When you take a “collateral loan”, you are agreeing that if you are unable to repay the loan, the lender legally can seize and take ownership of the agreed upon assets (such as your car, jewelry, real estate, etc.).

Please know this information is not meant to scare you, but to make you aware of how important it is to repay a loan, and to evaluate whether you will be able to pay it back before borrowing. For example, if you do not think you can pay back a longer-term loan, perhaps consider a short-term payday loan. There are numerous resources available to help you determine what type of loan is best for you. Make sure to do your research before applying to protect your financial future.

What To Do if You Are at Risk of Default

If you think that you are at risk of defaulting on your debt, there are steps you can take try and prevent default, but you need to act fast to utilize all the options.

1. Be transparent and call the lender before you are past 30 days and let them know what your situation is. They will likely try to come up with some sort of payment plan for you such as extended repayment periods, temporary reduced payments, etc.
   
2. Pay something on your loan to show that you are trying and not abandoning the lender. Even if just a few dollars, paying that is better than nothing, and the lender may be more likely to work with you.
   
3. You can also request to refinance your loan or consolidate it to help avoid defaulting on your debt.

   There are other things that you can try to do as well, but the most important thing is to communicate with the lender. If they think you are not going to repay, you could face major repercussions no matter what. If you communicate with them, this will show you are trying to repay your loan, and you could have a better chance to work out some form of new agreement.

What Steps to Take to Recover From Default

Managing your debt and recovering from defaulting on debt can be difficult, but it is not impossible and just takes time and patience. It is extremely important to rebuild your credit to have a steady financial future. Making on-time payments, decreasing your credit use, and budgeting could help improve your credit over time.

We recommend seeking resources for credit counseling that will help you learn to budget properly and manage your debt. Creating and sticking to a budget shows you how much you are spending each month compared to how much you are earning. If you are struggling with bills, a budget allows you to adjust your spending, so you are putting your finances in the right places. A budget could also help you start building an emergency fund, which could be useful for unexpected expenses and to avoid debt default.

Be proactive and do proper research before applying for a loan and make sure that you are prepared to make the payments over time. Investigate all the products a business has to offer and choose a reliable lender. And always advocate for yourself—if you are not sure if you can make a payment on time be sure to communicate with the lender. More communication is better than none and could ultimately be what saves you from defaulting on your debt.

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