Notice of Default: What Is It and What Does It Mean?
If you miss loan repayments, you might receive a notice of default from your lender warning that you have broken your credit agreement. If you can't pay your debt, you risk defaulting on your loan.
If you’re struggling to make credit or loan repayments, you may be at risk of defaulting on your agreement. However, before a default can be registered against you, creditors have to send you a notice of default (or a default notice) to give you a chance to make up your missed payments.
Find out more about default notices and what you should do if you receive one.
The following information on default notices applies to credit cards, personal loans, hire purchase, and any other debts that are regulated by the Consumer Credit Act. Check the terms of your credit agreement if you’re not sure if this applies to you.
What is a default notice?
A default notice is a formal letter sent by a creditor, warning you that you’re behind on your repayments. You will typically receive a default notice if you’ve not kept up-to-date on your payments for between three and six months.
It is effectively a nudge from the lender to make your payments within a certain period of time, before things get more serious. Lenders legally have to give you at least 14 days to respond. If you don’t respond to the notice or make the payments before the deadline, you will default on your credit agreement and could face legal action.
Receiving a default notice doesn’t mean you have already defaulted on your loan or credit agreement. However, it is important that you take the correct steps if you receive one.
In the notice, the lender will tell you:
- How you’ve broken the terms of your agreement, such as by missing payments.
- What you need to do and how much you need to pay to get your account back on track.
- How long you have to catch up with your payments (this should be at least 14 days).
- What would happen if you didn’t manage to repay the necessary sum.
An information sheet from the Financial Conduct Authority (FCA) should also be included in the letter, explaining more about default notices and where you can go to access debt advice and guidance.
Lenders and creditors legally have to send a default notice before they can take any further legal action to collect your debts.
What to do if you get a default notice
Don’t panic if you receive a notice of default. But it is important that you act as soon as you receive it, as ignoring it could result in more serious, long-term consequences. You will have at least 14 days to respond.
First, make sure everything on the default notice is correct, including your personal details and the amount of money you are supposed to owe. If you think there are any errors, contact the creditor immediately.
Assuming everything is accurate, if you can pay off the required amount and meet the demands of the default notice, your account won’t default and you won’t face any more consequences. Your account will continue as normal and you’ll need to continue making any future payments.
If you can’t repay the full amount but can afford to make some kind of repayment, it’s worth contacting your lender to see if you can work out a new payment plan. If the lender agrees, you may be able to repay the debt in smaller, more affordable instalments and avoid any further action being taken against you.
If you ignore the notice or can’t repay the debt as requested, you will default on the loan. This means the lender believes you can’t repay the loan at all and will cancel the credit agreement. They may take further action to get back the full amount you owe.
If an agreement can’t be reached, the lender could:
- Pass on your debt to a debt collection agency.
- Take you to court. You may end up with a county court judgement (CCJ).
- Apply to court to repossess your vehicle or other goods if the debt was a hire purchase agreement or logbook loan, for example.
You don’t need to go through this process alone. If you get a notice of default, or you’re worried about missing payments, you can contact a debt charity, such as StepChange, to receive advice and guidance on your situation. They can help you talk to your creditor and work out a way to get your finances back under control.
If you’re struggling with multiple debts, advisers may suggest applying for a Breathing Space, which can give you some time to get help and sort out your finances.
How will a loan default affect my credit score?
A notice of default itself won’t affect your credit score. If you respond to the notice and make the required payments, a default notice won’t appear on your credit history. However, any missed payments reported to the credit bureau that meant you received the notice will lower your credit score.
If you can’t pay the amount listed in the default notice and you default on your agreement, your credit score will be affected.
A loan default will remain on your credit history for six years. If you pay off the debt later, this will be reflected on your credit history, but the default notice will still stay on your record for the same length of time.
As a result, any time that you apply for credit in the following six years, the lender will see that you have previously failed to make your repayments and defaulted. This could make it harder to get accepted for credit as you are seen as a greater risk.
However, this doesn’t mean that it will be impossible to secure some form of credit. There are some lenders who specifically offer products to borrowers with more patchy credit records, but interest rates will typically be higher than those on products available to borrowers with stronger credit records.
You may be able to add a notice of correction to your credit history to give a short explanation of why you received a default notice. If there were extenuating circumstances, such as illness or unemployment, you could improve your chances of getting accepted for credit in the future, especially if you have since settled your debt.
How to avoid getting a default notice
If you’re struggling to make any payments, it’s important to get help as soon as possible, rather than waiting for things to get more serious.
Firstly, you can contact your lender to see if you can arrange a new payment plan that would be more affordable for you. If possible, it’s best to do this before you fall behind on your repayments. For example, you may be able to reduce your payments and extend your term, or even take a payment holiday, which means you wouldn’t need to make payments for a certain period.
However, depending on how serious your situation is, the lender may not always be able to help.
If you’re finding it difficult to make repayments and you want some advice, you can contact a debt charity for help.
They will listen to your problems and try to advise you on what you can do next. They can help you to understand your rights and offer you support when talking to your lender. Importantly, these charities don’t charge for their services.
Charities that may be able to help you include:
Bear in mind that if you’re struggling to make loan or credit repayments, applying for more credit to cover these costs is unlikely to be the answer. Using a loan to repay existing loans can cause you to spiral into more debt, putting you in a worse position than when you started.
» MORE: How debt charities can help
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more