Do you know when a missed payment on a loan becomes a default?
It happens sooner than you think. Once your payment is 30 days overdue, you are often officially in default, and things can start happening swiftly.
What happens when you default on a loan? Your bank can send your loan to collections. It can also cancel your accounts. And your credit score will likely take a nosedive. Plus, if your loan is secured, then your collateral is at risk.
In other words, you want to avoid defaulting on a loan when you can.
Delinquent vs. Default: What’s the Difference?
When you miss a payment, you have time before you enter default.
The first day your payment is overdue, your loan enters delinquency. You still want to avoid delinquency because it’s expensive. The lender often charges you a late fee, either as a dollar amount or as a percent of the overdue payment, depending on your loan agreement.
If you make a payment within a few days, you can take your loan out of delinquency and get back on track.
However, once you reach 30 days overdue (or 90 days for specific loan types), you enter default.
Lenders report both late payments and defaults, and neither are good for your finances or your credit. But defaults are arguably worse because good payment behavior can make up for delinquency. Defaults haunt your credit report for years.
What Are the Consequences of Defaulting on a Loan?
Once your loan enters default, the ability to repay the missed payment(s) often leaves your hands. From the lenders’ perspective, your account is closed and unredeemable (in most cases).
In most cases, your loan product moves to collections – either in-house or through a sale to a collections agency.
You then have to work with collections to repay the balance, and they are much less forgiving than your original lender. The collections desk wants to close the account, and they will work to seek as much of the outstanding balance as possible – not just your payment.
What is more, a collections team is more likely to escalate the case. They might take you to court and ask for a wage garnishment from the judge. Collections can also ask the court to place a lien against your other assets.
If you have a secured loan on a vehicle title (or another property), then the lender can take the asset back. Your loan agreement will outline the cases in which you lose possession of your vehicle.
In the case of defaulting on a mortgage, the laws differ by province. However, defaulting on a mortgage usually triggers a foreclosure, which can be difficult to escape once initiated. You only have a few months to negotiate the reinstatement of your loan and pay the arrears plus legal fees – or even the remaining balance of the loan in its entirety.
The only real exception tends to be for student loans. If you default on a Canada Student Loan and you meet the rehabilitation requirements, you can move your loan back to the NSLSC and keep it out of collections.
How Does a Default on a Loan Affect Your Credit Score?
Missing payments negatively impacts your credit score almost immediately, depending on whether your lender reports your payment history immediately.
However, months of missed payments and an eventual default can send your credit score tumbling.
When you miss a payment, you can make up for it with consistent on-time payments. But defaults are different: bad credit information stays on your account for six years from the date your debt moves into collections.
Although your credit score may be the least of your worries when your loan is in default, it is something to consider before you borrow and when deciding how to make payments on the loan.
A default now can damage your ability to access credit in the future, mainly if your credit score wasn’t healthy to start.
Does My Unpaid Debt Ever Go Away?
You can’t pay back your loan, and it goes into collections. What if you can’t ever pay it back?
There’s a common misconception that your unpaid debts eventually fall off a cliff. If you don’t acknowledge them, then they don’t exist.
You might be happy to learn that there is at least a grain of truth in the belief. The government does have a statute of limitations of old debt, and eventually, they disappear from your credit report.
The statute of limitations impacts the length of time after defaulting on a debt that a creditor can take you to court. The law of limitations varies widely: in British Columbia, it is only two years, but in Manitoba, Nova Scotia, and the territories, it is six years.
Being unable to take you to court means they can’t garnish your wages after this time. However, they can continue to contact you and ask for repayment. Some may even threaten you with a lawsuit, even when they can’t legally sue you anymore.
The bottom line: your creditor’s rights start to disappear, but the debt itself doesn’t go away until you repay it or settle with the creditor.
You Should Avoid Defaulting on a Loan At All Costs
Missing a payment or two won’t destroy your credit, but a default on a loan can make your life even harder than before. Once you default, your creditor (or the collections agency) has more rights when seeking repayment. If you never got in touch with them when you were struggling to make payments, they won’t be as lenient.
What’s more, a debt you defaulted on doesn’t go away, unless it is a secured loan attached to a vehicle or property. You still have to pay it back, and collections agencies, in particular, aren’t keen to write it off.
At Captain Cash, we understand that missed payments happen. Our borrowers can always talk to us when life gets in the way. We offer generous payment arrangements that keep you out of collections and help get you back on track.
Are you in need of a loan? Contact us to learn more about the services we provide.