A loan is considered to be delinquent when the borrower has missed one or more payments and is behind on their repayment schedule. Generally, a delinquent loan means that the borrower has broken the terms of their loan agreement and will likely be charged a late fee and have the delinquency reported. In this stage, the borrower is expected to remedy the delinquency and continue making payments as agreed.
If multiple payments are missed consecutively over an extended period, the loan then goes from delinquency and enters into default, where more serious repercussions can take place. Action may be taken by the lender and may include sending the debt to collections, seizing assets, or prompting legal proceedings.
Key Takeaways:
- A delinquent loan is a loan that is considered to be past due on its payments.
- Creditors will look for a history of delinquencies or default before coming to a decision of issuing financing.
- The consequences of delinquency become more serious the longer the payments are past due.
- Both delinquency and default can impact your credit score and ability to secure future financing opportunities.
How a Loan Goes Into Default
Essentially, there’s a designated period in which the borrower has to repay any delinquent payments. If the missed payments haven’t been remedied, the loan officially enters into default.
As an example, consider a mortgage loan that has a monthly payment requirement. If the borrower misses their monthly payment, they’re considered delinquent on the loan. If the borrower misses their mortgage payment by three consecutive months, the mortgage then moves into default. The borrower will have to cure the delinquency in full—or the default process starts.
The timeframe can vary depending on the loan agreement and lender, although it can be a matter of either weeks or months. It’s important to reference the loan agreement to determine the consequences of default, as the terms set by the lender may differ.
Delinquency vs Default
While both delinquency and default are representative of missed payments and violation of a loan agreement, the differences lie within their timelines and consequences. Generally, both can impact your creditworthiness as a borrower; however, each has varying implications.
Timelines
The key difference with a loan going into default versus being delinquent is the extended timeframe of missed payments and action being taken by the lender.
- A loan is considered to be delinquent as soon as a payment is missed. If the borrower is delinquent for an extended period, it enters default.
- When a loan goes into default, it typically means that there are numerous missed payments, and the lender needs to recoup its financial losses.
Consequences
Whereas a delinquency has more mild repercussions, default comes with more severe consequences.
- If a loan goes into default, such repercussions can include a negative impact on the borrower’s credit score, the lender taking legal action against the borrower and seizing assets, or the lender selling the debt to collections agencies.
- With loan delinquency, although the conditions of the loan haven’t been met, the lender likely won’t take legal action—as long as the borrower makes the payments and remedies the issue in a timely manner. However, the lender can still report the missed payments if it’s been 30 days or more, which can show up on the borrower’s credit report.
The lender also may impose late fees or other penalties that will be required with the overdue payment. It’s common that a lender will assign applicable penalties a few days after a missed payment. Such fees can range depending on the loan, so it’s important to reference the loan agreement for specifics regarding delinquency and default penalty details.
How Delinquency Can Impact a Borrower
If a borrower has a history of being delinquent on their loans, it may further strain their financial situation with overdue fees or other penalties. That said, there are a variety of factors that can impact a borrower if they end up being delinquent on their loans.
Some considerations to keep in mind are:
- Credit score: Both loan delinquency and default can negatively impact your credit score with each missed payment. In fact, such instances can show up on your credit report for up to seven years before it can be adjusted.
- Legal action: There’s the possibility of legal action if you end up in default. Creditors may turn to suing you for failure to uphold your end of the loan agreement and to collect monetary losses.
- Asset seizure: If your loan is secured by collateral and you end up in default, the lender may act to seize the secured asset and sell it off to recoup financial losses. This can mean losing real estate, business equipment, and more.
- Debt collections: If the lender sells your debt to a third-party collection agency, you may be subjected to frequent collection efforts to pay off the debt.
- Future financing: Since delinquencies are monitored and will reflect on a credit report, it may be difficult to get a small business loan if your credit and financial history are less than ideal. Lenders may consider you to be high risk, and even if presented with financing options, you’re likely to be subject to higher rates and fees to mitigate risk to the lender.
- Higher APR: If you’re delinquent on a credit card, you may be hit with a penalty APR that increases your payment obligation. While this will vary per credit card company, it can be more costly over time and impact your budget.
What to Do if You Have a Delinquent Loan
In the event you have delinquent loans and are headed towards default, there are ways to remedy the current missed payments and prevent further instances.
Consider the following options:
- Consolidate debt. If you have multiple delinquent loans, you can consolidate your existing debts into a single new loan that may provide you with lower interest rates and overall lower monthly payments when combined. This can allow you to manage your debt more effectively and keep better track of your payments.
- Consider refinancing. If you have a singular loan and are unable to modify it, you may be able to refinance it and take advantage of longer repayment terms that will reduce your monthly payment obligation. Make sure to review the business loan requirements set by the lender for better odds of approval.
- Modify the loan. Instead of refinancing for new loan terms, you may be able to work with your lender and negotiate a modification to the existing loan. Whether it be to extend the loan term or re-evaluate interest rates, this may be an option that can help lower your monthly payments.
- Communicate with your lender. Let them know why you’re delinquent and what you intend to do to remedy the situation prior to the loan entering default. They may offer a modification or simply let you know what the delinquency and default process is for the loan.
- Sell your assets. If restructuring your loan isn’t an option, you could look to sell some assets to make up for late payments and help pay down the outstanding balance of the loan to reduce the outstanding balance.
Frequently Asked Questions (FAQs)
Delinquent loans can impact a borrower’s overall creditworthiness and affect a borrower’s ability to secure further financing. The borrower also may be subject to late fees or other penalties if they are delinquent on their loan payments.
Mainly, a loan is considered delinquent if the borrower has missed a required loan payment or has violated terms set by their loan agreement.
Yes. You should make an effort to repay a delinquent loan, especially before it goes into default. If not, you risk further consequences, such as lowering your credit score, being unable to get financing in the future, or the lender taking legal action against you.
Bottom Line
A delinquent loan can have a negative impact on your creditworthiness as a borrower. If you are delinquent with your payments and allow the loan to go into default, there’s even more risk involved that can damage your credit, result in the loss of your assets, or even be a cause for suing you. It’s important to note the consequences of delinquency outlined within your loan agreement and ensure you make timely payments to avoid any such penalties.
