What is a Delinquent Loan?

A loan is considered "delinquent" when a borrower doesn't make a loan payment on time. Most lenders allow consumers a grace period to make up a missed payment and get their loan out of delinquency. However, once a loan is delinquent for a certain period of time, it becomes at risk of going into default. It's important to make timely payments in order to avoid defaulting, which can have negative impacts on credit score and the ability to receive credit in the future.

Delinquent Loans Explained

Most simply, a delinquent loan is any form of debt for which a payment has not been made on time. As such, loans are considered delinquent immediately after the first payment is missed. Most lenders allow borrowers to be late on one or two payments before serious consequences occur, but consistently paying loan bills late or missing multiple payments in a row can lead to default. When a borrower defaults on a loan, the entire unpaid balance is immediately due, rather than only the monthly payment.

Having a record of delinquent accounts can significantly increase the interest rate that a consumer receives on any future loans. It can also make it much harder to be approved for a credit card, apartment, or even a cell phone plan. To avoid these possibilities, it's important to pay all loan bills on time whenever possible. If you can't make a loan payment, it's a good idea to contact your lender to work out a different repayment plan or request a deferment on the loan.

Takeaways

  • Loans become delinquent immediately after a missed payment
  • Having delinquent loans negatively affects credit score
  • Severe consequences can be avoided by contacting your loan servicer

How Loan Delinquency and Default Works

The primary risk of not paying back a delinquent loan is that the account goes into default. A loan is considered defaulted if the borrower fails to repay it on the terms that were agreed to in the loan contract. While having a temporarily delinquent account can be rectified by making consistent payments in the future, it is much more difficult to resolve a defaulted loan—especially if you don't have a lot of cash on hand.

Loan typeHow to long until default after last payment?Grace period?
Student Loan270 days90 days to make a payment
Mortgage30 days15 days to make a payment
Credit Card180 days1 missed payment allowed before penalty
Auto Loan1 to 30 daysVaries widely

Student Loans

Most lenders will report delinquent accounts to the credit bureaus—i.e., the agencies who generate credit reports—90 days after a payment is missed, which will trigger a drop in the borrower's credit score. After 270 days, student loans are considered in default and the entire balance of the loan is due. At this point, debtors are no longer eligible to refinance their loan or take on any more student debt. Lenders or loan collectors may be entitled to garnish a portion of the borrower's wages for loan repayment, meaning that employers can withhold income and send it to the debt collection agency.

One way to avoid defaulting on student loans is to contact your loan servicer as soon as debt is at risk of becoming delinquent. In most cases, loan servicers will allow borrowers to change their repayment plans to lower the monthly payment. Eligible borrowers can also postpone loan repayment through deferment and forbearance plans. If you're interested in changing your loan repayment, you can find information on your loan servicer here, and eligibility requirements for deferment and forbearance here.

Takeaways

  • Student loan borrowers have 270 days, or about 9 months, to fix their delinquent loan status
  • Wages can be seized to pay back defaulted student loans

Credit Card Debt

Missing credit card payments can significantly increase the cost of the outstanding debt. Most credit card companies add a late payment charge of $35 to $40 the second time a payment is missed, while also applying a penalty interest rate. Lenders can report accounts as delinquent to the agencies who determine consumers' credit scores, which can cause scores to plummet by as much as 125 points. Credit accounts that slide from delinquency into default are sent to debt collection agencies, whose job is to contact borrowers until they pay back their overdue loans.

Defaulting on credit card debt will make it much harder to be approved for consumer credit in the future. When figuring out how to pay back your bills, it's important to remember that paying the minimum allowed amount, at the very least, is better than paying nothing. In the worst case scenario, taking out a personal loan to consolidate credit card debt can be one way to improve your financial situation.

Takeaways

  • Late payment fees and increased interest rates are applied when missing credit card payments
  • Having a history of delinquent credit accounts makes it much harder to get approved for future loans

Mortgages

The regulations regarding mortgage delinquency, default and foreclosure vary by state. However, lenders tend to give 15 day grace periods after a missed payment. At those points, late fees of about 5% of the monthly mortgage payment are charged. This means that a borrower with a $1,500 monthly payment would pay a $75 late fee. After 30 days with no payment, most mortgages are considered in default. Mortgage loan servicers use aggressive communication tactics to notify borrowers that they must make the missed payments with penalty fees, or they are at risk of foreclosure. After 120 days without making a mortgage payment, a borrower's home can be seized.

As with all cases of delinquency, it's most important to stay in contact with your mortgage servicer and communicate your financial situation. If your finances won't allow you to make your monthly mortgage payment, it's best to see what options are available to you before your loan slides into default. If you justify your financial hardship, your servicer might allow you to postpone payments for a few months, extend the loan term or repay the missed installments at the backend of the mortgage.

Takeaways

  • Most mortgage servicers provide a 15 day window to make a payment without penalty
  • There are payment options that can help during periods of financial hardship

Auto Loans

The requirements for what constitutes auto loan default tend to vary at different lenders and auto finance companies. In general, car loans are considered to be in default anytime between 1 and 30 days after the last payment is made. After a few weeks, loan servicers usually contact borrowers to notify them of their default and to encourage them to get their payments up to date. If payments are not made, creditors have the right to repossess a borrower's car to fulfill the debt. Because car value declines over time, repossession alone is often not enough to fulfill the outstanding debt, which leaves some consumers paying down a car they no longer own.

The best way to stay out of default is to avoid taking on high-interest rate, long-term car loans—which creditors often market to low-income, poor credit score consumers. These types of loans often leave borrowers underwater and owing more on their loan than their car is actually worth. As with other loans, it's also possible to get a deferment from your loan servicer before repossession happens, which will enable you to postpone your payments. While obtaining a deferment is likely to decrease your credit score, it may enable you to keep your car.

Takeaways

  • The standards for default can vary widely depending on your loan servicer
  • Financial trouble can be avoided by taking on smart loans that don't exceed your car's value

Other Types of Loans

For personal loans and business loans, the rules for default vary by lender, but the timeline for serious action usually begins after a 30 day grace period. For loans backed by collateral, known as "secured loans," loan servicers can seize the collateralized asset to repay the debt. For a business, this could mean that equipment is taken or that future revenue is pledged to the lender. For an individual consumer, this could be a physical asset like a car or house, or a monetary asset like an investment, savings account or future paycheck.

For personal loans which aren't backed by collateral, lenders will often add late fees and penalty interest rates after missed payments. Similar to credit card delinquency, debt collection agencies will begin contacting a borrower after their delinquent loan goes into default. For business loans not secured by collateral, like a merchant cash advance or peer to peer loan, lenders generally accept a higher risk in extending credit. In these cases, lenders are most likely to renegotiate the terms of the loan or write off the debt altogether—although this can severely affect you and your business' ability to receive future credit. As with other loans, it's best to determine with your loan servicer whether there are alternative payment plans before accepting loan default.

Takeaways

  • Personal loans generally have a 30 day grace period after becoming delinquent
  • Defaulting on a businesses loan can affect your personal ability to receive credit

Sources

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