Delinquency vs. Default: An Overview
Delinquency and default are both loan terms representing different degrees of the same problem: missing payments. A loan becomes delinquent when you make payments late (even by one day) or miss a regular installment payment or payments.
A loan goes into default—which is the eventual consequence of extended payment delinquency—when the borrower fails to keep up with ongoing loan obligations or doesn't repay the loan according to the terms laid out in the promissory note agreement (such as making insufficient payments). Loan default is much more serious, changing the nature of your borrowing relationship with the lender and with other potential lenders as well.
- Delinquency and default are both references to missing payments; however, the implications and consequences of each term are different.
- Payment delinquency is commonly used to describe a situation in which a borrower misses a single payment owed for a certain type of financing, such as a student loan.
- A loan is said to go into default when a borrower fails to keep up with the loan repayments agreed upon or in some other way fails to honor the terms of the loan.
- Defaulting on your loans impacts not only your immediate financial situation but can have a negative influence on your future financial endeavors.
- Your credit score takes a hit when you are delinquent on your loans, and of course, if you go into default.
Payment delinquency is commonly used to describe a situation in which a borrower misses their due date for a single scheduled payment for a form of financing, like student loans, mortgages, credit card balances, or automobile loans, in addition to unsecured personal loans. There are consequences for delinquency, depending on the type of loan, the duration, and the cause of the delinquency.
For example, assume a recent college graduate fails to make a payment on their student loans by two days. Their loan remains in delinquent status until they either pay, defer, or forebear their loan.
On the other hand, a loan goes into default when a borrower fails to repay their loan as scheduled in the terms of their promissory note. Usually, this involves missing several payments over a period. There is a time period that lenders and the federal government allow before a loan is officially in default status. For example, most federal loans are not considered in default until after the borrower has not made any payments on the loan for 270 days, according to the Code of Federal Regulations.
Delinquency will impact the borrower's credit score, but defaulting has a much more pronounced negative impact on it, as well as on the person's consumer credit report, which will make it tough to borrow money in the future.
Consequences of Delinquency and Default
In most cases, delinquency can be remedied by simply paying the overdue amount, plus any fees or charges resulting from the delinquency. Normal payments can begin immediately afterward. By contrast, default status usually triggers the remainder of your loan balance due in full, ending the typical installment payments outlined in the original loan agreement. Rescuing and resuming the loan agreement is often difficult.
Delinquency adversely affects the borrower's credit score, but default reflects extremely negatively on it and their consumer credit report, making it difficult to borrow money in the future. They may have trouble obtaining a mortgage, purchasing homeowners insurance, and getting approval to rent an apartment. For these reasons, it's always best to take action to remedy a delinquent account before reaching the default status.
Student Loans and Delinquency vs. Default
The distinction between default and delinquency is no different for student loans than for any other type of credit agreement. Still, the remedial options and consequences of missing student loan payments can be unique. The specific policies and practices for delinquency and default depend on the type of student loan you have (certified versus non-certified, private versus public, subsidized versus unsubsidized, etc.).
Nearly all student debtors have some form of a federal loan. When you default on a federal student loan, the government stops offering assistance and begins aggressive collection tactics. Student loan delinquency may trigger collection calls and payment assistance offers from your lender. Responses to student loan default may include withholding tax refunds, garnishing your wages, and the loss of eligibility for additional financial aid.
There are two primary options available to student debtors to help avoid delinquency and default: forbearance and deferment. Both options allow payments to be delayed for a period. Still, deferment is always preferable because, depending on the type of loan, the federal government might actually pay the interest on your federal student loans until the end of the deferment period. Forbearance continues to credit interest to your account, although you do not have to make any payments on it until the forbearance ends.
Only apply for forbearance if you do not qualify for a deferment.
How Long Do Delinquencies Stay on a Credit Report?
Unfortunately, if you are delinquent in paying your bills on time, your credit will take a hit. Negative information like late payments may remain on your credit report for seven years.
How Do I Find Out if I Have Delinquencies on My Credit Report?
The best way to find out if you have delinquencies on your credit report is to review it at least annually, if not more often. Any late payments or other negative information will be available to you when reviewing your credit history via your report. You are legally allowed one free copy of your credit report every 12 months from the three largest credit reporting companies: Equifax, TransUnion, and Experian. You can also purchase your credit report at any time.
How Do I Remove Delinquencies From My Credit Report?
Delinquencies will fall off your credit report after seven years from the original delinquent date. If you find misinformation on your credit report, you can contact the lender to dispute the claim or negotiate to have the claim removed from your credit report.
How Long Does It Take for a Credit Score to Increase After Paying Delinquencies?
As mentioned, late payments can remain on your credit history, impacting your credit score for as long as seven years. However, you can counterbalance the impacts of late fees by improving your credit in other ways, like keeping your credit utilization low, paying cards on time, and using your credit wisely. This may, in turn, raise your credit score, even with the delinquencies. In addition, how many days payments are past due (e.g., 30, 60, or 90) is part of the equation for determining your credit scores.
What Is the IRS Interest Rate on Delinquencies?
When you are late paying your taxes, you will get hit with fines from the Internal Revenue Service (IRS). As of May 2023, according to the IRS website, "the late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%."
The Bottom Line
Delinquency and default reflect a problem with debt due to missing payments or paying late. Becoming delinquent on your loan payments may lead to defaulting on your loans, whether that's rent, mortgages, student loans, or credit card debt. Delinquency can lead to high fees and increased interest rates, plus it will hurt your overall credit.
When you default on a loan, it will alter your relationship with your lender, and it can make it extremely difficult to borrow money in the future. Suppose you find yourself falling behind on payments and becoming delinquent on your loans. In that case, it is crucial to reach out to your lenders to find a solution before you end up defaulting on your loans and negatively impacting your credit and future opportunities to borrow money.