Delinquency refers to a situation where a borrower fails to make loan payments when they are due. These payments could be for any form of debt – mortgages, personal loans, car loans, credit cards, student loans, etc. A loan goes into delinquency the first day after you miss a payment.
The time period after a payment becomes due varies by lender and type of loan. Generally, however, if a payment is missed by 30 days, the loan is considered delinquent, and the borrower may start to incur penalties. If the delinquency continues, the borrower’s credit score can be negatively impacted.
If a loan remains in delinquency for an extended period of time (typically 90 to 180 days, depending on the lender and the type of loan), the loan is considered to be in default. At this point, the lender may initiate legal proceedings to recover the debt, including foreclosure for a mortgage, repossession for a car loan, or wage garnishment for some other types of debt.
It’s important for borrowers to communicate with their lenders if they are having trouble making payments. Many lenders are willing to work with borrowers to modify the terms of the loan or to set up a repayment plan in order to avoid delinquency or default.
Example of Delinquency
Let’s say Jane took out a car loan and her monthly payment is due on the 1st of every month. If Jane misses her payment on the 1st of July, her loan is technically in delinquency starting from the 2nd of July.
If Jane still has not made her payment by the 1st of August, her loan is typically considered to be 30 days delinquent. At this point, the lender may start to charge late fees, and Jane’s credit score may start to decline.
If Jane continues to not make payments, by the 1st of October, her loan is considered to be 90 days delinquent. Her credit score is likely to have dropped significantly by this point, and the lender might repossess the car to recover the money it is owed.
However, if Jane were to contact her lender after missing her July 1st payment and explain her situation, the lender might be willing to work with her to modify her loan terms, such as reducing her monthly payment or deferring payments for a period of time. This could help Jane avoid delinquency or at least mitigate its impacts.
This example demonstrates why it’s important to communicate with lenders if you’re having difficulty making payments. Not only can this potentially help you avoid penalties and damage to your credit score, but it can also help you manage your financial situation more effectively.