A:

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 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.

Defining Delinquency

Loan delinquency is commonly used to describe a situation in which a borrower misses its due date for a single scheduled payment for a form of financing, like student loans, mortgages, credit card balances or automobile 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 his student loans by two days. His loan remains in delinquent status until he either pays, defers or forebears his loan.

Defining Default

On the other hand, a loan goes into default when a borrower fails to repay his loan as scheduled in the terms of the promissory note he signed when he received the loan. Usually this involves missing several payments over a period. There is a time lapse that lenders and the federal government allow before a loan is officially placed 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. In contrast, default status usually triggers the remainder of your loan balance to be due in full, ending the typical installment payments set forth 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 on his consumer credit report, which makes it difficult to borrow money in the future. He may have trouble obtaining a mortgage, purchasing homeowners insurance and getting approval to rent an apartment. For these reasons, It is always best to take action to remedy a delinquent account prior to reaching default status.

Student Loans

The distinction for default and delinquency is no different for student loans than for any other type of credit agreement, but 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 that you have (certified versus non-certified, private versus public, subsidized versus unsubsidized, etc).

Nearly all student debtors have some form of 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 of tax refunds, garnishing of your wages and the loss of eligibility for additional financial aid.

There are two primary financial options made available to student debtors to help avoid delinquency and default: forbearance and deferment. Both options allow payments to be delayed for a period of time, but deferment is always preferable because the interest on your federal student loans is actually paid by the federal government 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.

RELATED FAQS
  1. What are the long-term effects of delinquent accounts?

    Find out more about loan delinquency, loan defaults and the long-term consequences of borrowers who are delinquent on their ... Read Answer >>
  2. What special powers does the government have to collect student loans?

    Contact student loan companies before student loans default, as the government has the power to get its money. Prior to default, ... Read Answer >>
  3. Can student loans hurt your credit?

    Paying student loans on time helps build credit; failure to do so, hurts it. Read Answer >>
Related Articles
  1. Financial Advisor

    What to Do When You Can't Repay Your Student Loans

    Student loans should be kept in good standing no matter what. Here are some tips on managing your loans.
  2. Personal Finance

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  3. Financial Advisor

    Deal with Your College Debt Using These Steps

    The worst thing to do with college debt is to ignore it. The best way to start tackling it is with a clear roadmap to financial freedom.
  4. Financial Advisor

    Federal Direct Loans

    These are the most popular type of federal student loan. Read this guide to the types you can get, how much you can borrow and repayment options.
  5. Personal Finance

    Why You Should Be Wary About Most Student Debt Advice

    Falling victim to bad student debt advice can drain your wallet. Take a look at the most common ploys you want to steer clear of.
  6. Personal Finance

    10 Tips to Topple Student Loan Debt

    How to manage those burdensome payments as you embark on adult life.
  7. Financial Advisor

    Disadvantages of Federal Direct Loans

    Federal Direct Loans are popular ways to get federal help with college costs. However, they do have some drawbacks, especially for graduate students.
  8. Personal Finance

    Don’t Fail Student Loan Debt 101

    Don't be a statistic! According to a recent study, six in 10 Millennials don’t know what they owe or what to do with student loans after they graduate.
RELATED TERMS
  1. Delinquency Rate

    The percentage of loans within a loan portfolio that have delinquent ...
  2. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans — ...
  3. Delinquent Account

    A credit card balance on which a consumer has failed to make ...
  4. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  5. Renegotiated Loan

    The result of an agreement between a borrower and a lender to ...
  6. Term Loan

    A loan from a bank for a specific amount that has a specified ...
Trading Center