Defaulting on a loan is stressful - not to mention its potentially serious consequences. This Know How guide will help you understand what defaulting is and what to do next.
If you’re having trouble keeping to the terms of a credit agreement and are struggling to make repayments, you could risk defaulting on your loan. It can have serious repercussions on your financial situation, so it’s always best to be certain you can afford the repayments on a loan, and be wary of how a change in your circumstances can affect it.
What does default on a loan mean?
You default on a loan if you break the terms of your contract – often by missing or underpaying your repayments. It means you could be at risk of your creditor cancelling the terms of your credit agreement.
If you default on your loan, your creditor could demand the full amount to be paid upfront – instead of staggered payments as set out in your loan agreement. Your creditor will contact you to collect what they owe and could even take the case to court.
What happens if I miss repayments?
If you miss more than one repayment you will firstly receive a notice of arrears. If you cannot make further repayments you will then receive a default notice.
What is a notice of arrears?
Your lender will send a notice of arrears after two missed contractually agreed payments. It’s a legal requirement that your creditors send this notice before taking any further steps. A notice of arrears will not be recorded on your credit history.
The notice letter must be sent within two weeks of the missed payment instalments and your lender cannot charge you for this notice. The letter should detail how much you owe, as well as where you can seek advice about your debt.
What is a default notice?
You might receive a default notice if you’re behind on your loan payments, and you’ve already received a notice of arrears.
If you haven’t paid the required repayment amount for three to six months, under section 87(1) of the Consumer Credit Act 1974 your lender will send a default notice as a warning that your account is about to default.
The notice will detail how much money you owe, as well as provide a deadline to make this payment. You’ll have two weeks to rectify the situation and catch up with your missed payments. If you fail to do so, your account will default.
Does a default notice show up on my credit history?
No, a default notice will not be recorded against your credit history. However, if you still cannot make your payments, a default will be added to your credit records and can affect your financial status in the future.
What happens if I default?
Failing to catch up on your repayments during your two-week notice window will mean your lender will register a default on your credit report. The lender could ask for the full amount of the debt you owe, instead of the instalments detailed in the original loan terms.
It may be possible to arrange a new instalment plan with your lender. However, your lender has no obligation to agree to new terms.
The consequences of defaulting on a loan can be serious. If your home is secured against your loan, it could be at risk.
What can the lender do if I default?
If your lender defaults on your account, there are several steps they can take.
- Pass the debt to a collection agency - a collection agency specialising in collecting debt will contact you about your outstanding payments.
- Take court action - your lender may decide to escalate the situation with court action.
- Applying to court to take back goods - if the debt is a hire purchase, the lender can ask the court to repossess your purchase, such as a vehicle.
If your loan is secured to your property, the court could force you to sell your home to pay back the debt. Please note that paying back the first-charge lender, the mortgage, is the first port of call in this circumstance.
How long does a default stay on your credit file?
A default stays on a credit file for six years before it is removed. If you pay off your debt within this time you can upgrade to ‘debt satisfied’.
How does defaulting on a loan affect my credit score?
Defaulting on your loan will negatively affect your credit score and your default will stay on your credit file for six years. It will be recorded against your credit records so potential investors or loan providers will see that you couldn’t make your repayments.
You may find it harder to get credit or take out other loans in the future based on these entries in your credit report and the resulting impact on your credit score. Any loans that you do successfully secure will be likely to cost you more, and you’re likely to have less flexibility over the terms and rates.
What can I do if I miss repayments on a loan?
If you miss repayments on your loan, the first thing to do is to get in touch with your lender. Being at risk of default is a significant sign that your current repayment arrangement isn’t right for you.
It’s important to remember at the end of the day, your lender wants to get their money back so they could be open to altering your repayment schedule. They may decide to actively help you with repayment holidays or even have a discussion around changing the repayment terms.
If you require further help, reach out to StepChange for advice and support with your debt.
For further financial advice check out Norton Finance Know How for money management help and customer stories.