Financial Dictionary -> Debt -> Default

In finance and business, the term default refers to when a borrower breaks the contractual terms of their
agreement, whether that be missing a payment date or breaking a rule that was agreed on before the loan was given. If default occurs a number of actions may take place, from simple reminders to full scale legal action.

Default can occur on all types of loan, including mortgages, student bursaries, various forms of store credit/finance etc.

There are essentially two types of loan default, the first being known as "debt services default" and the second being "technical default."

Debt services default simply means that the borrower has not made a payment on the given date, without giving the lender sufficient prior warning, in which case they may happily give an extension if there is no major cause for concern.

Technical default happens when any other terms or conditions of the loan or credit agreement have been broken. A lot of the extra terms only apply to big businesses and are known as covenants. Examples of these may be that the business' finances have decreased past a certain level. Although they haven't missed any payments it may be a sign of negative things to come and the lender probably encouraged this type of agreement for extra security.

"Negative specific covenants" are clauses that prevent a business from undertaking various corporate acts such as selling major assets, which again could be a sign of financial troubles that have not yet caused the business to reach debt services default level.

If any type of default occurs it's the lender's right to deem the borrower unable to pay, and they can take legal action, although that would be foolish if there is an adequate explanation, which is often accepted. If however the borrower cannot make the payment after several warnings and negotiations then legal action will be taken, including court bankruptcy proceedings, the process of selling collateral (such as a house) which was agreed on if payment couldn't be made and various other actions. If it is a personal loan then the borrower may seek credit counseling and debt consolidation so the loan is passed on to another company that can pay it off.