It’s a scary thing to think about – defaulting or failing to pay back a loan – especially the consequences that come with it.
Defaulting on a loan of any type can put your assets or collateral at risk of repossession; a black mark on your credit history; and mounting fees and charges as a bank or lender tries to recoup their money. Defaults may also end up in court judgements, which can follow you around for five to seven years. But don’t panic! Defaults in Australia are relatively rare – and there are things you can do to prevent defaults if you’re afraid of missing loan payments.
In this article, we’ll tell you what a default is, what it means for you and your finances, and whether there is a huge risk of credit default in Australia or not.
What is a credit or loan default?
A credit or loan default occurs when a borrower has missed a loan or bill repayment and has failed to pay it back within 60 days. This isn’t a blanket description, though. Default terms are written out in any loan agreement you will sign and may range from as few as 30 days up to 90 days or beyond. Defaults don’t occur after minor delays or slip ups, like missing a payment after a couple of days or even a week. You may have to pay late fees and the incident may be recorded as a “late payment” on your credit history.
A default is far more serious, as it indicates to other lenders or banks that you are a high credit risk.
In the business world, businesses can record defaults against other businesses who fail to pay invoices above $150 that are in arrears beyond an agreed limit (e.g., 30, 60, 90 days etc.)
What happens if your loan is secured?
If your loan is secured, i.e., tied to an asset such as a car or a house, a loan default could mean seizure or repossession of the property by the lender. The lender then sells the property to recoup any lost money.
What happens if your loan is unsecured?
If your loan isn’t secured, the lender doesn’t have anything to sell to recover their money. Instead, they may proceed to debt collection. If one still owes the money, they may go to court for a judgement against the borrower. The judge may order wage garnishment (pay docking) or forced seizure of assets to pay off the loan.
In both scenarios, your credit score will be severely impacted for at least five to seven years. People with defaults will find it difficult to gain access to finance and if they do, they face higher than average interest rates.
What are the statistics on defaults?
According to credit reporting body Illion, the thirty plus day delinquency rate (another term for being behind in loan or credit repayments) for personal loans (major personal loans above $5,000) were just below 3% in 2023. These are not considered defaults in the usual sense, as we’ve discussed above. However, consider that Australians as of May 2024 have $2.56 billion in personal loans according to the Australian Bureau of Statistics. In 2024, the risk of credit default among Australians was 2.4%. Among the general population, defaults on loans are pretty unusual.
How to avoid a default
If you are struggling to keep up with repayments or have a sudden change in circumstances (layoffs, injury, etc.) you need to tell your lender as quickly as possible. The lender may offer you an extended grace period, loan repayment variations, or a temporary hold on repayments until you can get back on your feet. It’s a lender’s responsibility to ensure you’re better off financially, and in their interest to be paid off on time and in full.
Remember to read and understand your loan agreement to see what your rights and responsibilities are when it comes to defaults. It could avoid a nasty turn of events.
The information presented here is general in nature and should not be a substitute for expert legal or financial advice.
FAQs
I have defaulted before, can I still get a small loan?
Yes – at Fundo, we believe everyone deserves a second chance at finance. You can borrow a fast cash loan, even if you have a default on your credit history. Certain eligibility criteria may apply.
I am scared that I might miss a loan payment, what should I do?
First, contact the team at Fundo immediately. We’ll talk through your situation and see what we can do to help. We want to ensure you can pay back your loans on time and in full without going into further financial hardship. As outlined above, we may be able to sort out a plan that ensures everyone walks away better off.
Can I still borrow the maximum amount if I’ve defaulted on a loan?
This may depend on your current income, source of income, and other factors we look at when you submit your application. If you have many defaults or bad credit, it may be difficult to take out the maximum amount of $5,000 on a small instant loan. However, we endeavour to help anyone in need while leaving them better off financially.
Do you have to check my credit history when I apply for a small loan?
No – the team at Fundo use our own methods to determine whether you’re suitable and eligible for an instant cash loan. We don’t have to formally conduct a credit check to approve an emergency loan, which is one of the many advantages of applying for a small cash loan at Fundo!
My credit history says I have defaulted on a bill or loan but I’m certain that wasn’t me. What should I do?
If you notice that you have a default on your credit file that you’re sure you didn’t cause, you need to contact the credit provider or company to straighten things out. Sometimes defaults may occur in your name when utilities were registered to you in a sharehouse and one housemate forgot to pay the bill in full (as an example.) If you can prove that the default is not your fault or was placed there in error, it will be removed (expunged, as they say in the biz) from your credit history.
