What Happens if You Default on a Loan?

Wondering what happens if you default on your small loan? Learn more in Savvy’s handy guide today!

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Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
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, updated on December 22nd, 2023       

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Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on December 22nd, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

Navigating the financial landscape can be challenging, and understanding the consequences of defaulting on a loan is crucial for responsible financial management. If you've ever wondered “What happens if you default on a loan?”, you've come to the right place. In Savvy’s comprehensive guide, we explore what they are, the potential outcomes and steps you can take in the event of a loan default. Read more with us today!

What is a loan default?

A loan default occurs when a borrower fails to fulfil the agreed-upon terms of a loan, such as by missing scheduled payments. In essence, it is the failure to repay the loan according to the established repayment plan. Defaults can happen for various reasons, including financial hardship, unexpected life events or poor financial planning. When a borrower defaults, it triggers a series of consequences outlined in the loan agreement, which can adversely impact the borrower's credit score and financial standing.

The exact timing of when a default occurs will be determined by your lender and outlined in your small loan contract, but these are typically anywhere from 30 to 90 days after the scheduled due date. It’s important to know that defaults won’t occur immediately; you’ll generally be charged late fees until you reach the default threshold.

What happens if I default on a loan?

Defaulting on a loan can lead to a variety of adverse consequences. The specifics vary depending on the type of loan and the terms outlined in the loan agreement. Some common repercussions include:

  1. Impact on credit score: loan defaults significantly harm your credit score. This can affect your ability to secure future loans and credit cards or even impact applications for rental housing.
  2. Accrual of fees and penalties: as mentioned, defaulting generally results in the imposition of additional fees, penalties, and increased interest rates. These financial burdens exacerbate the overall debt.
  3. Collection attempts: lenders may engage in aggressive collection efforts, including contacting you directly or employing debt collectors in an attempt to recover the outstanding amount.
  4. Legal action: in severe cases, lenders may take legal action to obtain a court judgment against you, enabling them to garnish wages or seize assets.

How do I avoid defaulting on my loan?

Preventing loan default requires proactive financial management. Consider the following strategies:

  • Create a budget: develop a realistic budget to manage your income and expenses, ensuring you allocate sufficient funds for loan repayments. This will also help you determine what loan amount is realistic for you to be able to cover consistently across its term.
  • Emergency fund: establish an emergency fund to cover unexpected expenses, reducing the likelihood of financial strain. This gives you something to fall back on if you find yourself cash-strapped and need money urgently.
  • Communication with your lender: if facing difficulties, communicate with your lender early. They may be able to offer alternative repayment plans or solutions to help you through temporary financial setbacks.
  • Automatic payments: set up automatic payments such as direct debits to ensure timely and consistent repayments, minimising the risk of forgetting to pay.
  • Regular financial checkups: periodically review your financial situation, adjusting your budget and strategies as needed to stay on track with loan repayments so you can have your debt paid off as soon as possible.

By staying informed, communicating with your lender, and maintaining a proactive approach to financial management, you can significantly reduce the risk of default and navigate your loan obligations responsibly.

Common questions about loan defaults

How long will a default remain on my credit report?

A default will stay on your credit report for five years in Australia. As mentioned, this will impact your credit score and ability to take out certain loans in the future.

Will a default stay on my credit report even after I’ve paid it?

Yes – a default will remain on your credit report for the same duration even after you’ve paid it. While it may show as “paid,” the fact that a default occurred can still impact your credit history. However, paying your default as soon as possible will be more beneficial than leaving it sitting unpaid on your file.

Will I be notified before my lender records a default?

Lenders are required to provide 30 days’ notice before recording a default. This may be sent immediately after you miss your scheduled payment, but some lenders will wait a month or more before sending this notification. This notice allows you the opportunity to address the issue, explore solutions and avoid the default being recorded on your credit report.

Can I take out another loan to cover my overdue small loan before I default?

While you won’t be able to take out another small loan to cover the cost of your existing small loan, you may be able to bundle multiple outstanding debts into a consolidation loan. This enables you to clear any debts which you’re at risk of defaulting on and extend your repayment period to make it more comfortable for you.

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Disclaimer:

The information on this website is of general nature and does not take into consideration your objectives, financial situation or needs.

For loans between $2,050 and $5,000, the APR is between 21.24% (minimum) and 48% (maximum) per annum. Comparison rate of 65.4962%. Minimum term is 16 days and maximum term is 24 months. The cost of the loan is a $400 establishment fee and monthly interest charged on the amount borrowed. For example, a loan of $3,000 over 3 months with an APR of 48%, (comparison rate of 65.4962%), will have an establishment fee of $400, monthly repayments of $1,225.20. Total repayments of $3,675.60 and total interest payment of $275.60.

Warning: A comparison rate indicates the true cost of a loan. Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.