Delinquency vs. Default: What's the Difference?

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

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.

Default

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.

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.

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.