What it is
A default is what happens when a borrower can’t repay a debt. It is possible for individuals, companies, and even government entities to default on an obligation.
A loan is considered to be in default when a borrower fails to make payments according to the contract terms. When borrowers miss a payment or pay less than is required, lenders may offer a grace period before the loan officially goes into default.
What it means for you
As an individual, you should avoid defaulting on a loan since it can damage your financial standing. Late fees and interest will keep piling up the longer you’re unable to pay and so your credit rating will likely go down.
Your credit history affects your ability to take out loans with favorable terms in the future. Lenders may also take possession of properties like your house or car if you default on a secured loan.
That’s why you should think carefully before entering a loan agreement. Make sure you fully understand the terms and can pay in full and on time.
As an investor, default risk (also known as credit risk) is something to consider before you invest in debt securities like bonds. This is the possibility that an issuer won’t be able to pay interest or repay the full amount it owes.
The likelihood of a default is also worth checking if you want to look into a company’s financial health before investing in its stocks.
