No matter what you’re trying to finance, whether it’s a car, a house, or some other major expense, it can take months, if not years to pay off in full. Unfortunately, during that time finances can change, making it difficult to pay off the loan. If you’re currently struggling to pay off your debt, it’s best to seek financial help before defaulting on your loan.
Depending on the lender and the loan, whether it be unsecured or secured, defaulting on your loan could result in severe consequences.
Loan default happens when a borrower fails to make payments according to the terms of the loan agreement. A loan is considered in default if payments are missed over a specific period of time, as per the contract. When a loan is in default, it is sent to a debt collection agency, which takes steps to reach out to the borrower to obtain the unpaid funds.
Loan defaults can occur on several types of loans, including the following:
Many loans are considered to be in default 30 days after a missed payment, though some may be considered in default after 60 or 90 days. The exact time frame depends on the loan type, the lender, and the contract terms.
The following chart outlines the average length of time that missed payments occur before a loan is considered in default, according to each type of loan:
| Loan Type | # of Days Until Loan is in Default From Last Payment | Grace Period (in Days) |
| Student Loans | 270 | 90 |
| Car Loans | 1 – 30 | Varies by lender |
| Mortgages | 30 | 15 |
| Personal Loans | 90 | Varies by lender |
| Credit Cards | 180 | 1 missed payment |
If you don’t keep up with your loan payments, your financial and credit health can be negatively impacted. Here are a few consequences you may suffer if you fail to make timely loan payments and allow your loan to go into default.
Your payment history is one of the most important factors that influence the calculation of your credit scores. Missing loan payments and failing to make up for them within a specific time period can pull your credit score down.
Most lenders charge late payment fees. Loans are expensive enough, but you could be making your loan even more costly with added fees that your lender tacks on as a result of missed payments.
You’ll have a grace period within which to make up for the missed payment, but if that time frame expires, the late charges will take effect.
In addition, you could be charged a non-sufficient funds (NSF) fee if your lender tries to withdraw the money from your bank account, but there isn’t enough available to cover the full payment.
Low credit as a result of missed payments will impact your ability to secure loans and credit products in the future. A default on your credit report tells lenders that you may not be responsible with your finances and aren’t trustworthy enough to honour your loan contracts. In turn, lenders may not be willing to work with you in the future.
Even if you can get approved for a loan, a previous default could mean your interest rate will be much higher. As such, your loans may cost you a lot more than they should.
If the loan you default on is secured by an asset of value, you could risk losing that asset. For instance, secured loans like mortgages and auto loans are collateralized by your home or vehicle, respectively. If your loan goes into default, your lender may have the right to repossess the collateral in order to recoup their losses.
If your loan goes into default, your lender could obtain a court judgment to garnish your wages to make up for the payments you missed. If this happens, the money will be taken directly from your paycheques until the entire balance you still owe is repaid, plus interest. Keep in mind that this is a more severe consequence, this won’t happen if you forget to pay your credit card one month.
The specific type of consequences you may suffer as a result of defaulting on your loan depend on the loan type, as follows.
The consequences of defaulting on your personal loan depend on whether the loan is secured or unsecured. If the loan is secured, the asset used to collateralize the loan may be seized by the lender. If the loan is unsecured, consequences may include fees and having your account sent to collections.
Your home collateralizes your mortgage. If you default on your home loan, your lender may repossess your home. In this case, you may be stuck with a short sale or foreclosure. However, lenders may be willing to work something out with borrowers to avoid foreclosure, as this drastic process can be costly for both you and your lender.
Like a mortgage, an auto loan is secured, which means it’s collateralized by a valuable asset. In this case, your vehicle collateralizes your auto loan. If you default on the loan, you could lose your car. The lender will attempt to sell the vehicle to cover any outstanding debt.
Again, the lender will likely prefer to work something out before resorting to vehicle repossession. As such, the lender may be willing to come up with another way to deal with the outstanding debt, such as restructuring the loan terms to help make it easier for you to repay your balance.
As mentioned, your credit score plays a key role in your ability to secure loans and credit products. The higher the score, the better. But if you default on a loan, your score can take a big hit.
When you miss a loan payment, your score could be affected shortly after, or it could take months before you see any impact. If you can make up for that missed payment within 30 days, you may not see any effect, as you’ll have a grace period to make good on your loan. But if your missed payment goes beyond the 30-day mark, it’s likely to be noted on your credit report and pull your score down.
Most lenders report payment activity to Equifax and TransUnion, the two main credit bureaus in Canada. When you’re overdue on a payment, these agencies will be informed and will adjust your credit report accordingly.
A loan default can remain on your credit report for up to seven years. That means any time you apply for a loan or credit product within this time frame, the lender will see this mark when they pull your credit report to verify your creditworthiness. This will raise a red flag for the lender, who may consider you a risky borrower and may not be willing to extend a loan to you as a result.
It’s best to take immediate action if you’ve missed loan payments in order to deal with the issue before it gets out of hand. The first thing you should do is get in touch with your lender to see if they’ve already contacted a collection agency.
If not, see if you can negotiate an arrangement with your lender to come up with a plan for you to repay your debt in a way that you can manage.
The exact way that you deal with your loan default depends on the type of loan in question.
Even if your default has already been noted on your credit report, there’s still a chance that the lender or creditor may be willing to remove the mark from your report if you can manage to pay off the outstanding debt in full. The goal is to have the lender mark your debt as paid off instead of in default.
You may have the option to settle your debt with your creditors for less than what you originally owed. If your creditor agrees to this arrangement, you’ll pay a percentage of the principal amount, then the creditor will discharge the remaining balance. Sometimes creditors will settle for a repayment that’s less than what you owe to avoid a complete loss.
The debt associated with the settlement will likely be marked as “settled” on your credit report and not as “paid off”.
| Cost | Credit Score | Credit Report | ||
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | No | Visit Site |
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | - |
The best way to deal with a loan default is to avoid it in the first place. Here are a few tips to help you steer clear of loan default.
Don’t apply for a loan without first crunching some numbers. You should find out exactly how much money you have left over every month after all of your existing bills have been paid.
Come up with a budget that lists all your monthly expenses, tally them all up, then subtract them from your monthly income. The figure you come up with is the amount you have available to spend on anything else, including new loan payments. Make sure you have more than enough to cover these payments before agreeing to a loan.
Deferring loan payments means that you won’t make payments for a certain amount of time. Some loan agreements contain a clause that allows for loan deferral under certain circumstances. You’ll need your lender’s permission to defer your payments, which can provide you with some temporary relief from your financial obligations.
Keep in mind, however, that these payments are not cancelled. Instead, they’re simply postponed, which means they’ll eventually need to be paid at some point. Not only that, but the interest on these deferred payments may accrue during the deferral period. In turn, the amount you originally owed will increase.
If deferring your loan payments is not an option, you may consider refinancing the loan. Refinancing involves paying off an existing loan and replacing it with a new one.
If you can refinance to a new loan with a lower interest rate and better terms, you could save quite a bit of money each month. Your monthly loan payments may be smaller, which may fit better within your budget and make it easier for you to keep up with your payments.
However, it’s still possible that you may pay more on interest overall, despite lower interest rates and payment amounts.
Credit counselling can provide you with some guidance on how to better manage your debt. These experts will help you come up with a sound debt management plan to effectively pay off your debt, and stay out of debt.
Going into default on your loan is certainly not a good thing for both your credit and your financial future. It can take years until you can fully recuperate from the effects, so if you think you’re at risk of defaulting, it’s important that you stay on top of the issue and inform your lender before it gets any worse.
Rating of 4/5 based on 16 votes.
Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Frank Mortgage is Canada’s one-stop shop for mortgages. Get up to $1,500 cash back on your mortgage.
Great unsecured credit card for customers currently in, or recently discharged from, a consumer proposal or bankruptcy
Earn an average 5%¹ cashback at thousands of partners and at least 0.5%² cashback guaranteed with Neo.
KOHO’s Credit Building Program helps you build a better credit history with easy to manage payments for just $10/month.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
