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Finance

What Does It Mean to Default on a Loan?

Last June, almost 8 million Americans were in default on their student loans. It’s one of the first types of debt most Americans face as they graduate and enter the workforce. The current student loan debt is over $1.75 trillion.

There are many reasons that this type of loan default is so prevalent. The recent economic downturn could be one of them. If you don’t have any student debt, count yourself lucky.

However, you may eventually have to apply for a loan. Whether personal or business, it’s important to avoid defaulting on a loan.

But what does it mean to default on a loan? Read on to find out more.

Defining A Loan

A financial loan is a specific quantity of money that an individual borrows from a person or an organization. A loan application usually states the terms of the transaction.

This includes the promise to pay a set amount over a certain period until repayment of the full amount. During this time, interest is usually incurred on the unpaid balance.

A personal loan is usually used to cover various types of personal expenses. These can include vacations or medical bills. Getting a business loan involves getting funding to cover specific business-related expenses. It can cover the purchase of equipment or machinery, capital, or business expansion.

What Does It Mean to Default on a Loan?

This usually occurs when a loan isn’t being repaid according to the terms agreed upon. It may involve missing successive payments on any type of loan.

However, most loans have a grace period. This is the length of time a lender will give the borrower to make a payment. The length of time given will depend on the type of loan.

The borrower has an opportunity to use this time to bring payments up to date. There’s usually a specified period after the last payment that determines when the loan is in default.

What Happens if You Default on a Loan?

Defaulting on any type of loan can adversely affect your credit score. This can make it difficult to get future loans with favorable terms. You may end up paying more in interest.

What if you default on a loan secured with collateral? This is usually an auto loan or mortgage. You could end up losing your vehicle or home.

Some debtors may also hire debt collectors. These agencies can garnish your wages to get the outstanding debt still owed.

Sometimes missing a loan payment might be unavoidable. Most lenders know this and can be understanding.

It’s often advised that you contact your lender if you can’t make a payment. They might be able to give you extra time to pay without penalizing you.

Securing Your Credit

What does it mean to default on a loan? Now you know.

It’s often necessary to apply for a loan, especially when you’re starting a new business. It can help you keep the business going without using your funds.

Making the payments on time can help you build your credit and even secure future loans. It’s a great way to grow your business.

Looking for additional information on financing your business? Check out the Small Business Ideas in our Business section.

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