What Happens When You Default on Loans?

If you are unable to make your loan payments on time, you are probably wondering what happens when you default on a loan. Inability to make payments can cause stress, and not everyone knows what to do about the situation to minimize the damage.

Understanding what you can expect gives you time to prepare. When you have a clear picture of how the coming months will likely unfold, you reduce some of the stress and ease your mind. You are about to discover the top three things that can happen once your loan defaults.

Credit Score

The first problem you will face is taking a hit to your credit score. Each payment you miss goes on your credit report and impacts your score but going into default is much worse. These marks can make it hard for you to take out future loans, and you don’t want to fall into this trap if you can prevent it.

It could take you years or longer to repair the damage enough to buy a new car or move into a new home. Also, having bad marks on your credit score makes it harder to find jobs or get an apartment.


Depending on the type of loan you got and your credit score at the time of your application, you might have listed the property as collateral on your loan. This is common when you buy homes or vehicles, but you can also list other items as collateral when borrowing money. Going into default gives your lender the right to repossess your vehicle or foreclose on your home.

If you are defaulting on a car loan and don’t want to lose your personal belongings, make sure you clean your car out as soon as possible. Begin looking for other living options if you are unable to make your house payments. Although you might not be able to stop a repossession from taking place, you can plan for it to reduce the fallout.

Legal Action

You sign a legal contract promising to repay the loan each time you borrow money from the bank. Defaulting on your loan gives the lender the right to seek compensation in court, and you should prepare for legal action.

You will get a notice in the mail when the lender decides to sue, and the court will rule in the lenders favor if you don’t show up for your court date. If the court agrees you broke the terms of the contract, it can garnish your wages or put liens on your property. With a wage garnishment, the court automatically takes a percentage of your pay until you repay what you owe.

Final Thoughts

A lot of things happen when you default on a loan, and none of them are good. When making all your payments on time is out of the question, your best option is to prepare for what will come in the near future. Clearing everything out of your car or making other living arrangements in advance prevents a lot of stress. If you do your best to stay ahead of the problem, you can reduce the fallout and safeguard your future.