Default

A borrower usually moves through stages before default. Missing a payment makes an account delinquent. If payments remain unpaid for a set period, often several months, the lender declares the loan in default. The exact timing depends on the type of debt and the lender's rules.

Default has serious consequences. The lender may demand the full balance at once, add penalty fees and interest, pass the debt to a collection agency or take legal action. For secured loans, the lender can seize the collateral, such as a home or car. Default is recorded on the borrower's credit report and can make borrowing difficult and expensive for years.

Companies and governments can default too. A company that cannot pay interest on its bonds is in default, which often leads to restructuring or bankruptcy. A government that misses payments on its debt is said to be in sovereign default.

Default risk is the chance that a borrower will not repay. Lenders charge higher interest rates to borrowers they believe are more likely to default.