What does it mean to default on a loan?

Defaulting on a loan refers to the failure to meet the legal obligations or conditions of that loan agreement, primarily by not making the required payments on time or ceasing payments altogether. When a borrower defaults, it can have significant consequences, including damage to their credit score, potential legal action from the lender, and the possibility of losing collateral in secured loans.

Being late on payments or stopping payments entirely alters the borrower’s relationship with the lender, which can lead to penalties such as higher interest rates or fees. In severe cases, the lender may initiate repossession (if the loan is secured) or take further legal steps to recover the owed money. Therefore, understanding the implications of defaulting on a loan is critical for financial health and creditworthiness.

In contrast, paying off the loan earlier than agreed, refinancing for a lower interest rate, or transferring the loan involves actions that are typically beneficial for a borrower's financial standing and do not constitute default. These options indicate that the borrower is actively managing their debt rather than failing to meet their obligations.