What Are Delinquent Loans & How Can They Be Avoided? | Fora Financial
What Are Delinquent Loans?
May 07, 2019

What Are Delinquent Loans?

Hopefully, you’ll never have to deal with a delinquent loan as a small business owner. That said, delinquency is an important concept to understand if you’re borrowing money, or plan to borrow money to finance your business in the future.

A delinquent loan is any loan that has past due payments but has not yet gone into default. As you might imagine, this is never a good thing, 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 business owner.

Everything You Need to Know About Delinquent 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 loan is considered delinquent. However, that depends on the terms of your loan.

What Happens Once a Loan Becomes Delinquent

As 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.

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.

When Delinquency Turns into a Default

The 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 and often impossible.

How Delinquency Affects Your Credit Score

Once 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 such as the length of the delinquency, type of loan, and your credit history. Moreover, according to Equifax, the delinquency will stay on your credit report for about seven years.

Conclusion: Avoid Loan Delinquency

According 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.

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.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].