What Is a Default?

What Is a Default?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A default in the financial sense refers to the failure to meet one’s financial obligations. Usually, when you borrow money, you agree to pay it back within a certain period or by specific dates. A default occurs when you don’t pay back this money as agreed, meaning you’ve broken the terms of the loan agreement. Therefore, defaulting typically happens in terms of loans, such as mortgages, car loans, or student loans. It can significantly impact one’s credit score and make it harder to borrow money in the future.

Related Questions

1. What happens when you default on a loan?

When you default on a loan, your lender may take legal action against you. They may try to collect the debt, either directly or by selling the debt to a collections agency. You might also face penalties and your credit score could be significantly damaged.

2. How does a default impact your credit score?

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A default can significantly lower your credit score. Payment history is a major factor in your credit score calculation, and a default shows lenders that you’ve not been reliable with past credit obligations. This can stay on your credit report for up to seven years.

3. Can you get out of default?

Yes, you can get out of default through various methods. You might be able to negotiate a new payment plan with your lender, consolidate your debts, or in extreme cases, declare bankruptcy. It’s best to seek help from a financial advisor in such circumstances.

4. What is a default judgment?

A default judgment is a judgment in favor of the plaintiff (usually the lender) when the defendant (borrower) fails to respond to a summons or does not appear in court. Essentially, it’s the court agreeing with the lender’s view of the situation as the borrower does not defend their side.

5. Do secured loans default?

Secured loans can also default if the borrower fails to make repayments as agreed. In this case, the lender has the right to seize the asset (like a house or a car) that’s serving as collateral for the loan.