A delinquent loan is when a borrower is late on payments on returning borrowed money. When a loan repayment is late, the loan becomes delinquent.
Brad Nakase, Attorney
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Last year, Alina decided to start her own gastropub, which served classic American cuisine with creative twists. Everything was going well until the pub suffered a cockroach infestation, which closed down the restaurant for several months. As a result, Alina’s business lost a lot of money due to a lack of customers. Once the business reopened, Alina needed money for inventory as well as advertising. She needed to run a huge marketing campaign to convince customers that there were no longer cockroaches in the food. To secure these funds, Alina took out a loan of $50,000 from a lender. Per the terms of the loan, Alina was supposed to pay $2,100 on the first of the month for two years. At the beginning, Alina was careful to pay the full amount on the first of every month. However, the winter proves difficult for the business due to a lack of customers. As a result, Alina struggles to find the money to make her December payment. On the first of the month, she fails to make her payment. The lender contacts Alina to let her know she is now delinquent on the loan. Alina is worried. What, she wonders, is a delinquent loan?
A delinquent loan is any kind of loan that has past due payments but has yet to go into default. Depending on the term of a business owner’s loan, consequences of delinquency may vary. This is a bad position for a business owner to be in, and hopefully one will never find themselves in this situation. However, it does happen, and a business owner should know what to do if it does occur to them. This article will review how exactly a loan becomes delinquent, as well as what delinquency means for the borrowing business owner. Is it game over, or are the ways to manage this unfavorable situation?
First, let’s discuss what makes a loan delinquent. When a loan becomes delinquent, this means that a borrower, such as a small business owner, has failed to make their payment on time. For instance, a business owner decides to take out a $50,000 loan to be paid back over a 24-month period. Every month, on the first day of the month, they are expected to submit a payment. However, in March, the first comes and goes, and the payment has still not been made. The moment the payment due date has passed, the business owner’s loan is delinquent.
In some circumstances, there might be a grace period during which a business owner can make a late payment without consequence. However, this will depend on the terms of one’s individual loan.
When a loan becomes delinquent, a number of consequences can occur.
First, a business owner will face financial penalties such as fines or late fees. Some lenders might also charge a new rate, known as a penalty rate. That said, the timeframe for these penalties to come into play will depend on the specific lender’s policies. Some are more lenient than others.
For instance, a lender might charge a late fee the minute a loan turns delinquent. Another lender might decide to give a borrow 14 days to make their payment before charging a penalty fee or rate. Before a business owner takes out a loan, he or she should be sure to ask about their lender’s policies. This way, he or she is prepared in the event they default on their loan. If a business owner is concerned about cash flow, for example, then they may want to find a lender who is more lenient on late payments.
Whatever the penalty policy, a business owner can get rid of the delinquency by submitting the late payments before the loan goes into default. This will make the loan current again. In this way, the result of a delinquent loan depends largely on when, and if, a business owner makes up the late payments.
It is also important to recognize that lenders will be happy to work with a borrower if he or she is transparent and proactive about the situation. This means that if a business owner knows that he or she is in danger of making a late payment, he or she should contact their lender before the delinquency and start a dialogue. The lender will help resolve the situation and look favorably upon the borrower for their honesty and openness.
Generally, lenders are willing to reduce a payment amount of allow a business owner to delay a payment in the event of a difficult financial situation. Indeed, most lenders understand that crises occur, and they will help struggling business owners get back on track with their payments.
The moment when a loan defaults will depend on the policies of the specific lender. Again, some are more strict with others. In general, this will occur when a business owner has missed several payments in a row.
It is worse to default than be delinquent because when a loan defaults, the entirety of the loan balance becomes due at once. Also, a business owner can remove a loan from delinquency simply by making payments when they are due. However, removing a loan from default is much more difficult. Indeed, it is almost impossible for a business owner to succeed in rescuing a loan from default.
When a loan has been delinquent for 30 days, a lender can report the delinquency to credit bureaus. If the lender chooses to report the delinquency, this can potentially affect an individual’s credit score. However, the impact will depend on a few factors. These factors include the following:
According to Equifax, a delinquency can stay on a business owner’s credit report for around seven years. This may therefore affect a business owner’s ability to get another loan.
The bottom line is that business owners should do all in their power to avoid being delinquent on a loan. According to Dun and Bradstreet, as of the fourth quarter of 2018, the overall delinquency rate in the United States was a little over 3%. This small number shows that loan delinquency is relatively rare.
To avoid loan delinquency, it is essential that a business owner creates a reasonable payment plan with their lender to ensure that payments are made on time. If a business can realistically only pay $500 a month, then the owner should not agree to pay double that amount. Having a realistic plan at the beginning can help a business avoid delinquency, and it can also help a business stay in good financial health.
One should note that even though the risk of defaulting is statistically small, a business owner should always be conscious and proactive about the risk. Late fees, credit score consequences, and increased likelihood of default can significantly harm a business both immediately and long-term. Therefore, it is best to be cautious and aware.
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