D
efaulting on a loan payment is never a good feeling, and it can be a pretty scary experience. While there are ways to avoid defaulting on a payment, the unexpected can happen, so it's good to be prepared.
In this guide we'll explain what a loan default is and some tips on how to prevent defaulting. We'll also go through some of the consequences that might happen if you default, and what you can do if you have defaulted or are struggling to meet your repayments.
What is a loan default?
A loan default happens when you miss one of your repayments, and don’t repay it within an agreed amount of time. You may be sent a default notice the day after your payment becomes overdue, but some lenders may wait 30 days before sending a notice.
Once the notice has been sent, most lenders will require you to repay your outstanding debt within 30 days, known as the notice period. You then have to pay your original outstanding payment, along with any other repayments you may accrue during this period. Depending on the type of loan you hold, the consequences for defaulting can vary, which we’ll explain in more detail further below.
What causes loan defaults?
A loan default can occur for a variety of different reasons and depend on your personal circumstances. Some things that can cause a loan default are:
- Forgetting that you have a repayment due,
- Having multiple loans to juggle and pay off, or
- Experiencing financial hardship, natural disaster or illness.
Defaulting on your loan can be a stressful time, especially if you are also experiencing hardship, such as unemployment or illness. If you do need some assistance, you can reach out to your lender for hardship assistance, or an organisation such as Moneysmart or the National Debt Helpline if you need advice or support.
How do loan defaults work and the consequences
As we mentioned earlier, the way defaults operate and the consequences you face very depending on the type of loan you have defaulted on.
Most lenders and creditors will only pursue legal action as a last resort, and there are a number of laws that credit providers must follow and steps they must take before getting to this stage. The consequences we'll mention below are usually worst-case scenarios, so if you have defaulted on a loan or are worried about defaulting it's important to remember that you still have options.
As we'll talk about more later, talking to your lender or credit provider is a priority if you have defaulted on a loan or are struggling to meet your repayments. Doing this can help you avoid the consequences of defaulting, so don't hesitate to reach out for help.
If you default on an unsecured loan or credit card debt, your lender or credit provider can commence legal action against you after the notice period ends.
"If you don’t repay the loan, the credit provider must send a default notice giving you a minimum of 30 days to pay the amount you are behind plus your usual repayment"
If this happens, you would be sent a Statement of Claim or Summons, indicating that your provider intends to commence court proceedings. Some providers may also pass on your debt to a debt collection agency. If you are being contacted by a debt collector, check out Moneysmart’s website for more information on what debt collectors can do and some possible steps you can take.
Similarly, if you default on a secured loan, car loan, or home loan, your lender or credit provider will commence legal proceedings after the default notice period ends. However, the main difference here is that with a secured, car, or home loan, you have used an asset of yours as security. This means that your lender or credit provider has a lien over your property, which gives them a right to possess it until your debt is paid off.
There are rules for when your property can be seized. In the case of a secured loan or car loan, after the default notice ends your lender or creditor can seize your property. They must have either your written consent or a court order to seize your asset if it is on a residential property, but they don’t have to go to court with you. Once this has happened, you will usually have 20 to 30 days to repay your debt before your asset is sold.
In the case of your home loan, after the default notice ends you may be sent a Statement of claim, which will begin court proceedings. You’ll usually have a few days to respond, but this varies depending on your state. If a ruling is made in favour of your lender or provider, you may then be sent a Notice of Eviction or Notice to Vacate, after which you lose possession of your home and must vacate it.
Your lender or provider may also continue to proceed with legal action against you if they have sold your asset but couldn’t recover all their costs. Being served with a legal document such as a Summons or Notice to Vacate is serious, so be sure to seek out legal advice if proceedings are commenced against you.
If you are experiencing hardship, most lenders will offer hardship arrangements that you may even be able to enter into during the default notice period. These arrangements may change the terms of your contract either temporarily or in the long term, letting you repay what you can. As long as you follow the terms of your new arrangement, lenders won’t proceed with debt recovery processes, such as seizing your asset.
Tips to avoid defaulting on a loan?
1. Speak to a lender
This is the most important step if you have defaulted on a repayment, or think you’re at risk of defaulting. If you reach out to your lender early, they may be able to provide you with more solutions. Doing this before your debt begins to really accumulate is the best way of staying on track. This is especially true if you are experiencing hardship, such as unemployment, illness, or natural disaster, as they may be able to create a hardship agreement that you’ll be able to follow.
If you are a Greater Bank customer and are struggling to meet your loan repayments, you can find more information about the hardship assistance we offer on our website.
2. Understand your loan agreement
Understanding the terms and conditions of your loan agreement will help you to plan out when your repayments are due and what your payment schedule looks like, and to know what the consequences are for making a late payment or missing a payment. Make sure you also look into the features of your account – are there features you aren’t using or taking advantage of that could help you?
3. Evaluate alternative offers and financing options
If you are struggling to meet your home loan repayments, you may want to consider refinancing. This may get you a better rate or change your repayment schedule, which could mean your monthly payments decrease. You may also be able to take advantage of offers, such as a cashback offer, so refinancing is certainly something to look into.
If your credit card debt is beginning to accumulate or you are struggling to pay off your debt, you could consider strategies such as a balance transfer or debt consolidation. These strategies can be beneficial if you have multiple high interest debts, but can come with some risks, so be sure to research some of your options or chat to your lender.
4. Manage your budget
Creating a budget can be difficult, but it can really help curb your expenses and get you back on track. When creating your budget, it’s important to create a plan that you can stick to.
Make sure you account for all your needs, and while you may have to cut down on a lot of your wants its ok to motivate yourself by budgeting for a few treats here and there. If you're ready to get started, you can use our helpful budget planner calculator.
How Do I Get a Default Removed?
If you default on your repayment, it is recorded on your credit report. The best thing you can do in this scenario is to pay it off as soon as possible, or contact your lender for assistance if you are unable to repay it. When your default is paid or settled, your report gets updated to reflect that, but it remains on your report.
"Once a default has been listed it does not get removed simply because you pay back the debt"
A default may be removed in some specific examples, such as if your lender or credit provider made an error, you had requested hardship assistance before your default, or you defaulted because of something outside your control. If any of these circumstances apply to you, you can contact your lender, credit provider, or your credit reporting provider.
Does Defaulting on a Loan Affect My Credit?
Yes, defaulting can affect your credit score, but there are ways to recover. Paying off that default or entering into a hardship arrangement can help minimise the impact of a default, especially if you address your default early. This may not cancel out the effect of the default, but it can certainly cushion the blow to your credit score.
The next step is to stay up to date with your repayments. Setting reminders is a great way of staying on track, and depending on your loan you may even be able to set up automatic payments. If you are struggling to meet your repayments, be sure to reach out to your lender or credit provider early, especially if you are experiencing hardship.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.