Defaulted Loan: What Happens When You Default on a Loan

Reviewed by the LoanAgency.ca Editorial Team · Updated 2026-09-09

Learn what happens when you default on a loan in Canada, including effects on credit score, debt collection, and options like debt consolidation or consumer proposal.

A defaulted loan occurs when a borrower fails to meet the legal obligations of a loan agreement, typically by missing multiple monthly payments or violating other terms. In Canada, a loan is generally considered in default after 90 days of non-payment, though the exact timeline depends on your lender and contract. Defaulting on a loan triggers serious consequences, including damage to your credit score, collection efforts, and potential legal action. This guide explains the process, your rights, and the options available to Canadians facing debt difficulties. (General guidance only; consult a licensed professional for your situation.)

What Happens Immediately After You Default on a Loan

Once you miss a payment, the lender will typically contact you to remind you of the overdue amount. If payments remain unpaid after 30 to 60 days, the lender may report the delinquency to the credit bureaus — Equifax Canada and TransUnion Canada. A missed payment can lower your credit score by 60 to 110 points, depending on your credit history. After 90 days of non-payment, the loan is often classified as a defaulted loan, and the lender may accelerate the debt, demanding the full outstanding balance plus interest and fees immediately.

Credit score damage: A default stays on your Equifax and TransUnion reports for up to 7 years, making it harder to qualify for new credit, mortgages, or rental housing.
Collection calls: The lender may assign or sell your debt to a collection agency, which will contact you by phone, mail, or email.
Interest and fees: Late payment penalties, higher APR, and additional collection costs can increase your total debt significantly.

How Defaulting Affects Your Credit Score and Future Borrowing

Your credit score is a three-digit number that lenders use to assess risk. A defaulted loan signals to future lenders that you may not repay as agreed. This can lead to higher interest rates on any new credit, or outright rejection of applications for mortgages, car loans, or credit cards. In Canada, your credit score is calculated by Equifax and TransUnion using factors like payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%). A default severely impacts the payment history category, which is the most heavily weighted. Even after you repay the default, the record remains on your file for up to 7 years from the first missed payment, though its influence lessens over time.

Options to Deal with a Defaulted Loan in Canada

If you are struggling with debt, several formal options exist under Canadian law. These are not quick fixes, but they can help you regain control. Each option has different implications for your credit and financial future.

Option	Description	Credit Impact
Debt consolidation	Combine multiple debts into one new loan with a lower interest rate and single monthly payment.	May temporarily lower score, but improves with on-time payments.
Consumer proposal	A legal agreement under the Bankruptcy and Insolvency Act to repay a portion of your debt over time (usually up to 5 years).	Rated as R7 on credit report; remains for 3 years after completion.
Credit counselling	Non-profit counselling agencies help you create a budget and negotiate with lenders.	No direct credit impact; helps avoid further damage.

General guidance: Debt consolidation works best if you have steady income and can qualify for a lower APR. A consumer proposal is a formal insolvency option that stops collection calls and wage garnishment, but requires a licensed insolvency trustee. Credit counselling is a voluntary, educational service that does not erase debt but can help you manage it.

Legal Consequences and Provincial Regulations

In Canada, lenders can sue you for the unpaid balance of a defaulted loan. If they win a court judgment, they may garnish your wages, freeze your bank account, or place a lien on your property. However, provincial laws vary. For example, in Ontario, wage garnishment is limited to 20% of your net income, while in British Columbia, certain assets like your principal residence may be partially protected. Each province also has a statute of limitations (usually 2 to 6 years) after which a lender cannot sue for the debt. If you are facing a lawsuit, seek legal advice immediately. A consumer proposal can stop most legal actions once filed.

Steps to Recover After a Defaulted Loan

Recovery takes time, but it is possible. Start by reviewing your credit report from Equifax and TransUnion Canada for accuracy. Dispute any errors. Then focus on rebuilding your credit by making all future payments on time, keeping credit card balances low, and avoiding new debt. Consider secured credit cards or a small loan with a co-signer to demonstrate responsible borrowing. Over several years of consistent positive payment history, your credit score can improve. If your debt feels overwhelming, speak with a licensed insolvency trustee who can explain your rights and options, including consumer proposals and bankruptcy, in a no-obligation consultation.

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Frequently Asked Questions

How long does a defaulted loan stay on my credit report in Canada?

A defaulted loan typically remains on your Equifax and TransUnion Canada credit report for 7 years from the date of the first missed payment that led to the default. Even after you repay the debt, the record stays for the full 7 years, though its impact on your credit score diminishes over time.

Can I negotiate a settlement after defaulting on a loan?

Yes, lenders may accept a lump-sum settlement for less than the full balance to avoid the cost of collection. However, this is not guaranteed and depends on the lender's policies. Any forgiven amount may be considered taxable income by the Canada Revenue Agency. It is generally wise to get the settlement agreement in writing before making a payment.

What is the difference between a consumer proposal and debt consolidation for a defaulted loan?

Debt consolidation involves taking out a new loan to pay off existing debts, ideally at a lower interest rate, and requires a good enough credit score to qualify. A consumer proposal is a formal legal process under federal insolvency law that reduces your total debt and stops collection actions, but it requires a licensed insolvency trustee and stays on your credit report as an R7 rating for 3 years after completion.

Reviewed by the LoanAgency.ca Editorial Team

Our editorial team researches and fact-checks content to keep guides accurate and up to date. This guide provides general educational information about loans and does not constitute financial advice.