The definition of a delinquent loan is any loan that has past due payments but hasn't yet gone into default. As you might imagine, this is never a good position to be in, but depending on your loan term, the consequences of delinquency can vary. In this blog post, we’ll explain exactly how a loan becomes delinquent, and what delinquency means for you as a borrower and small business owner.
What You Should Know About Delinquent Business Loans:When a loan is delinquent, that means the borrower failed to make their payment on time. For example, if you had a business loan with payments due on the first of each month, the moment that due date passes, the loan becomes delinquent. In some cases, there may be a grace period before the business loan is considered delinquent. However, that depends on the terms of your loan.
What Happens Once a Loan Becomes DelinquentAs mentioned earlier, when a loan becomes delinquent, a variety of things can happen. Generally, you’ll face financial penalties such as late fees. Some lenders may also charge a new penalty rate. However, the timeframe for those penalties will vary depending on your lender’s policies. For example, one lender may charge a late fee the moment your loan becomes delinquent while another lender may give you 14 days to make your payment before charging a penalty. Before taking out a loan, it's crucial to find out your lender's policies so that you're prepared in the event that you default on your loan. Still, regardless of any penalty, if you pay off the delinquency by making the past-due payments before the loan goes into default, you can bring the loan current again. In that way, what happens once a loan becomes delinquent depends partly on when and if you make up your missed payments. It’s also important to note that lenders will generally be more willing to work with you to bring a delinquent loan current if you’re proactive and transparent. That means, if you know you’re in danger of missing a payment, you should contact your lender before it happens and maintain a dialogue until the problem is resolved. Often, lenders will be willing to reduce your payment amount or allow you to delay a payment due date. For instance, due to the COVID-19 pandemic, many business owners have found themselves in difficult financial situations. Most lenders are understanding of that and strive to help business owners get back on track.
When Delinquency Turns Into a DefaultThe point at which your loan defaults depends, again, on the lender’s policies. Generally, it occurs after you’ve missed several payments. Defaulting is worse than delinquency because when a loan defaults, the entire loan balance is due. In addition, while you can remove a loan from delinquency just by making whatever payments are due, removing a loan from default is far more difficult. In fact, it's often impossible for business owners to accomplish.
How Delinquency Affects Your Credit ScoreOnce your loan has been delinquent for 30 days, the lender may report it to the credit bureaus. If the lender does report the delinquency, the extent to which this impacts your credit score depends on many factors. Often, it includes factors such as:
- The length of the delinquency
- The type of loan
- Your business's credit history.
Conclusion: Avoid Loan DelinquencyAccording to Dun and Bradstreet, the overall delinquency rate among U.S. business in the fourth quarter of 2018 was 3.07 percent. As you can see, this isn’t a large number and it reflects the relative rarity of a loan becoming delinquent. To avoid loan delinquency, it's crucial to create a payment plan to ensure your payments are made on time. Not only will this help you avoid delinquency, but it'll also protect your business's overall financial health. However, just because the risk is small doesn’t mean you don’t have to think about loan delinquencies. After all, the late fees, credit score impact, and increased risk of default are all significant costs that will hurt your business in the short and long-term.
Editor’s Note: This post was updated for accuracy and comprehensiveness in January 2021.