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Loan Default

Written by
Wesley Mortgage
April 13, 2023
min read

Defaulting on a loan can have serious financial repercussions, such as a decreased credit score and limited access to credit. Not making payments on time can lead to the lender taking legal action to recoup the money owed. Borrowers should regard the causes and effects of loan defaults to ensure they do not face a difficult financial situation.


The borrower may become unable or unwilling to repay their loan, resulting in default. Common causes of default include financial hardship, unforeseen events, lack of understanding of loan terms, and strategic default. Defaulting has serious consequences, so it is best to prevent it.

Excessive Loan Amounts

This occurs when a borrower's income does not meet the loan's repayment terms. This may lead to default. The two primary causes of extravagant loans are predatory lending practices and misinformed borrowers taking on large loans. Choose a lender with care and seek financial guidance to prevent this.

Financial Mismanagement 

In regard to a loan default, financial mismanagement refers to the scenario in which someone has sufficient income; however, does not make payments due to poor budgeting, overspending, high debt, or expenses. Lenders and lawyers have the least leniency for bad financial planning/overspending regarding the default's repercussions.

Inability to Repay the loan

Anything that cuts off the borrower's ability to repay falls under this category. Job loss, rate changes (in the case of adjustable rate loans), Medical bills, or all forms of disaster that impact income or assets. This differs from an unwillingness to repay, in which someone defaults for their benefit (this  often results in serious legal consequences).


As mentioned earlier, many severe repercussions exist when defaulting on a loan. Although they change in scale depending on the reason (for instance, a person who lost their job or paid for life-saving surgery is offered more lenience than someone who spent the money in a casino) there are still implications, no matter the reason. The three main ramifications are the impact on credit score, collection, and legal actions.

Impact on Credit Score 

Depending on the loan type, default severity, and prior credit record, the score might be decreased by 100 points or more. This is because, to lenders, a default indicates that the individual is a high-risk borrower since they couldn't/didn't fulfill their payment obligations. This makes obtaining a new loan, credit line, or mortgage far more difficult, and if possible, the borrower has to accept higher interest rates and stricter terms.

Collection Actions 

Creditors recover assets or default amounts from borrowers. Common steps in this process include contacting the borrower about missing amounts, sending a formal demand letter, garnishing wages, placing a lien on the property, and seizing the property. Lenders may go to court to seek legal action if these steps do not suffice.


Defaulting is not an obligatory consequence. If you can foresee it, even a few weeks ahead, you can take many steps to prevent it. It is always worth the effort because it will save you money and alleviate stress.

Financial Education

To prevent loan defaults, financial education is the first step. Many universities offer online and in-person courses, but several free online resources help you learn about loans and finance. Before accepting a large debt, research the conditions, type of loan, etc. Wesley Mortgage provides numerous guides to help you understand mortgage loans.


Learning to budget is another excellent step in preventing a loan default, and it will also alleviate all financial worries. If you do not have a budget, it is easy to start! It can be as simple as budgeting for an emergency fund, setting aside funds for living expenses, dispensable income, and/ or debts. Whatever route will save money and stress in the long run.

Responsible Lending Practices

Be selective when choosing a creditor. First-time borrowers should be wary of lenders offering incredible deals, as this could lead to irresponsible or predatory behavior. Researching, comparing lenders, and asking for advice can help you find a reputable financier.  Let Wesely Mortgage assist you with all your mortgage needs.


Three resources are available to prevent default or to help you in case of a default. Using these resources to their fullest advantage is beneficial. They are financial advice, credit counseling, and debt consolidation services.

Financial Advice 

Seeking advice from financial professionals. Consider looking for an expert who specializes in your loan type. In addition, if you know someone who is knowledgeable about finances, ask them for their input.

Credit Counseling

This is a service that non-profit organizations provide to assist individuals in better managing their finances. The process involves working with a credit counselor, constructing a budget, and forming a plan to pay off debts. The counselor may also contact creditors to lower the interest rates and monthly payments. Credit counseling helps people become financially stable and avoid bankruptcy. 

Debt Consolidation Services

Debt consolidation combines multiple debts into one larger loan. With debt consolidation, creditors may agree to lower interest rates, allowing the borrower to pay with a single monthly payment. The purpose is to make repayment more manageable, reduce the overall cost, and help the borrower become debt-free faster. 

For more information or questions, contact a Wesley Mortgage representative today!

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