Delinquency vs. Default: What's the Difference?

Delinquency and default are both loan terms representing different degrees of the same problem: missing payments. A loan becomes delinquent when you make payments late (even by one day) or miss a regular installment payment or payments. A loan goes into default—which is the eventual consequence of extended payment delinquency—when the borrower fails to keep up with ongoing loan obligations or doesn't repay the loan according to the terms laid out in the promissory note agreement (such as making insufficient payments). Loan default is much more serious, changing the nature of your borrowing relationship with the lender, and with other potential lenders as well.

Payment delinquency is commonly used to describe a situation in which a borrower misses their due date for a single scheduled payment for a form of financing, like student loans, mortgages, credit card balances, or automobile loans. There are consequences for delinquency, depending on the type of loan, the duration, and the cause of the delinquency.

For example, assume a recent college graduate fails to make a payment on his student loans by two days. His loan remains in delinquent status until he either pays, defers, or forebears his loan.

On the other hand, a loan goes into default when a borrower fails to repay his loan as scheduled in the terms of the promissory note he signed when he received the loan. Usually, this involves missing several payments over a period. There is a time lapse that lenders and the federal government allow before a loan is officially in default status. For example, most federal loans are not considered in default until after the borrower has not made any payments on the loan for 270 days, according to the Code of Federal Regulations.

In most cases, delinquency can be remedied by simply paying the overdue amount, plus any fees or charges resulting from the delinquency. Normal payments can begin immediately afterward. In contrast, default status usually triggers the remainder of your loan balance to be due in full, ending the typical installment payments outlined in the original loan agreement. Rescuing and resuming the loan agreement is often difficult.

Delinquency adversely affects the borrower's credit score, but default reflects extremely negatively on it and on his consumer credit report, which makes it difficult to borrow money in the future. He may have trouble obtaining a mortgage, purchasing homeowners insurance, and getting approval to rent an apartment. For these reasons, It is always best to take action to remedy a delinquent account before reaching the default status.

The distinction for default and delinquency is no different for student loans than for any other type of credit agreement, but the remedial options and consequences of missing student loan payments can be unique. The specific policies and practices for delinquency and default depend on the type of student loan that you have (certified versus non-certified, private versus public, subsidized versus unsubsidized, etc.).

Nearly all student debtors have some form of a federal loan. When you default on a federal student loan, the government stops offering assistance and begins aggressive collection tactics. Student loan delinquency may trigger collection calls and payment assistance offers from your lender. Responses to student loan default may include withholding of tax refunds, garnishing of your wages, and the loss of eligibility for additional financial aid.

There are two primary financial options made available to student debtors to help avoid delinquency and default: forbearance and deferment. Both options allow payments to be delayed for a period, but deferment is always preferable because the federal government actually pays the interest on your federal student loans until the end of the deferment period. Forbearance continues to credit interest to your account, although you do not have to make any payments on it until the forbearance ends. Only apply for forbearance if you do not qualify for a deferment.