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There are a lot of different terms when it comes to the financial world. Some people do not know the definitional difference between terms like default, bankruptcy, and insolvency, among many other terms. If you're not exactly sure what it means to default on a loan, as well as the consequences of doing so and how to avoid it all together, you're about to find out all about it here.
What Does it Mean to Default on a Loan?
Defaulting occurs when the borrower fails to meet the terms they agreed to when getting the loan
. This could be failing to make payments at all for a certain amount of time (such as failure to pay for a couple months in a row) or making payments that are below the minimum. There are also other things that a borrower can do to default on a loan, depending on the terms outlined in the contract.
What Kinds of Loans Can You Default On?
Virtually any kind of loan can be defaulted on, whether it's a first or second mortgage
, a credit card
account or even student loans.
What are the Consequences of Defaulting?
Many people do not know just how severe it can be to default on a loan. For one, it can seriously damage your credit score, resulting in higher interest rates
and rejections for new loans. For another, it can significantly increase your monthly payments, or lead to legal action on the part of the lender. Simply put, defaulting on a loan has major consequences which is why it's best avoided.
How Can You Avoid Defaulting on a Loan?
- Always Make the Payments on Time. Every lender tells you exactly when payments are due by every month, and it's important you get them the payment by the due date. Don't wait until the due date to send it outódo it a week in advance if you're sending it by mail, or a few days in advance if you're paying it using your checking account.
- Always Pay At Least the Minimum. You can easily default on a loan by not paying enough on it every month. Always strive to pay at least the minimum and then some, if you can.
- Make Sure to Adhere to All Other Terms of the Loan. Most lenders are happy to explain the terms in detail to make sure you don't default on the loan. So if you're at all confused by the terms, ask questions and make sure you understand it well.
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