Loans

• A loan is any arrangement where an individual agrees to accept funds on credit for the promise of returning those funds at some point in the future. Common loan types include mortgage, car, student, business and personal loans. Most loans, with the exception of some loans between friends, must be repaid with interest on a monthly basis as a part of the arrangement. The promissory note is the official contract that establishes loan terms and what is considered a default.
  
  

Default

• A defaulted loan is one that is seriously past due in terms of regular monthly payments. It can range from missing one payment to completely abandoning the account and refusing to make any payments. The lender makes the final determination on whether to officially place a loan account in default status. The lender starts by making payment reminders and then progresses to more aggressive collection tactics, like daily calls and regular letters.
  
  

Penalties

• When a loan account is in default status, the account holder's credit report and score is in jeopardy. The lender can start reporting negative information to credit bureaus after the account falls 30 days late and continue to add negative information every additional 30 days. If the lender decides to write off the loan after several unsuccessful attempts to collect payment due, the payment unit will commonly sell the debt off to a third-party collection agency. In other cases, the lender may try to file a court case against the borrower to get a judgment and collect funds owed. For a secured loan like a mortgage or car account, the lender can also take action to retrieve the asset.
  
  

Making Payment Arrangements

• It is important to take action to correct a loan default as soon as possible because the more time goes by, the harder this is to resolve. When the loan account is in danger of default, the account holder can attempt to make payment arrangements with the lender. Communication is key, especially if you have an asset you want to keep. The lender may agree to modify the terms of the loan, such as payment amounts, interest rates and due dates. In other cases the lender may refer you to a credit counseling service for advice on how to best manage the debt.