Default

Definition

A default is what happens when you fail to fulfil a financial obligation, for example making a repayment on a loan or a finance agreement. A default can have serious consequences for your finance package and can severely affect your credit rating.

What happens when I default?

When you miss a payment, the finance provider will be in touch to alert you of the situation. They may send a reminder message or a warning notice, giving you a chance to make the payment within a set period of time and not affecting your agreement. This is to counter bank issues or short term financial problems that can easily be fixed. If, after the warning notice has expired, you are still unable to make the payment, then you will have defaulted on the agreement.

This can lead to a number of issues for you financially. You may have to pay back an additional penalty on top of the missed payment, and sometimes the interest rate that you borrow at can be increased. You may have your finance agreement cancelled and the item or product you financed being repossessed.

Will it affect my credit rating? 

Any defaults you make on a finance agreement will be recorded on your credit file. That means that, when you apply for a finance package in future, the provider will be able to see that you have defaulted on an agreement in the past. 

This will cause your credit rating to be negatively affected and your credit score will be lowered. You may still be able to get approved for a finance package, but the terms are likely to be less favourable and you will be charged more for the cost of the agreement.

A default will be recorded on your credit file for six years from the date it was issued, even if you were able to pay off the debt. However, the default will be removed from your file after the six year period has elapsed, even if you were unable to make the payment. The finance provider cannot re-add the default item to your file.

What should I do if I think I’m going to default?

If you think you are going to default on a repayment, you should contact the finance provider as soon as possible. They may be able to take a number of steps to help you get into a position where a default won’t happen. They may be able to come up with some sort of debt management strategy, so that you can work to ensure the package can be repaid. They may also offer a payment holiday, giving you a period of time to recover your finances.

The finance provider may also look at a way for you to return the item financed, meaning the package is cancelled without you defaulting on the payments. All Financial Conduct Authority (FCA) approved finance providers must work to ensure their customers do not get into unnecessary debt. So if you don’t use a provider that’s regulated, you may not have the same protection available to you, and could end up defaulting.