As an entrepreneur, you may inevitably need to borrow money. Business owners may
need to take a loan to fund a new business idea, expand their operation or cover their
operating costs when business is slow, and they don’t have enough cash to pay their
expenses.
Before taking a loan, it’s essential to understand the terms and be sure you can repay it.
It’s equally important to know the consequences of not being able to pay your debt. Two
consequences of not repaying are that the loan becomes delinquent and may go into
default.
Sometimes, people use these terms interchangeably, but they are different. Knowing the
difference between delinquency vs default before taking a loan is helpful.
Delinquency
A loan becomes delinquent when the borrower fails to make the repayments on time. The
loan may be considered delinquent even if the payment is a day late.
Whether you’ve taken a business or personal loan to help cover your business expenses,
it’s important to let the lender know if you can’t make the repayments so that you can
work on a payment plan.
Default
A default is taking delinquency a step further and is more serious. A loan becomes a
defaulted loan when the borrower does not make payments. The amount of time or
number of missed payments it takes for a delinquent loan to become a default varies
depending on the lender and the loan type.
In most cases, it takes 30 to 90 days of missed payments on a personal loan for it
todefault. Business loans allow a bit more time and typically go into default after six
months of missed payments.
Consequences of Having a Delinquent or Defaulted Loan
Sometimes, you may borrow money with the knowledge that you can afford to repay it,
but circumstances change, and the loan either becomes delinquent or defaults.
There are negative consequences to both delinquent and defaulted loans, and as an
entrepreneur, it’s vital that you know the consequences.
Consequences of Delinquency of a Loan
Depending on the lender and the loan terms, the lender usually adds a fee to the amount
owed when a loan is delinquent, even if it’s only a day late. A delinquent loan can harm
your credit score, especially if it’s repeatedly delinquent.
Consequences of Defaulted Loan
Defaulting on a loan can result in severe consequences. If the loan is secured, your assets
are likely to be seized. For unsecured loans, your details may be sent to a debt collector
who will try to get the total amount you owe from you.
Your lender may agree to a settlement wherein you will have to pay a portion of the
amount you owe in full.
A defaulted loan will have a massively negative impact on your credit score, making it
difficult for you to borrow money in the future. The default loan will also likely remain on
the business’s credit report for up to about six years.
What to do if You’re Unable to Repay Your Loan
Since the consequences of missing loan repayments can have long-term effects, it’s vital
that you’re proactive to minimize the impact.
Whether you can’t afford to make a payment or you can pay it but will only have the
money to pay it late, you must communicate this with the lender. The lender will probably
be more open to working with you if you’re transparent about your financial situation.
When you communicate early, you’ll be in a better position to negotiate. For example, if
you usually pay your monthly instalment on the 25th of each month, but you know that
you will only have the funds to pay on the 3oth, communicating this will the lender may
save you from having to pay penalties. In some cases, if you’re upfront, the lender may be
lenient and allow you to make a late payment without any consequences.
However, if you did not communicate and simply missed your payment date, the lender
may slap penalties or additional fees on the amount you owe for late payment.
Conclusion
Delinquency and defaulting both refer to situations in which loan repayments are missed.
Delinquency is when a loan is repaid late, whereas defaulting on a loan occurs when a
loan is not repaid or payments are missed for several months. Delinquency and defaulting
on a loan have consequences and can harm your credit rating, making it difficult for you to
take loans in the future.
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