What does defaulting on a loan mean?

Defaulting on a loan means failing to meet the legal obligations set forth in the loan agreement. This typically involves not making the required payments on time or not adhering to other terms, such as maintaining insurance or paying property taxes for secured loans. When a borrower defaults, the lender is usually entitled to take action, which can include initiating foreclosure processes on a secured loan.

In contrast, making all payments on time signifies compliance with the loan terms, while voluntarily paying off a loan early does not involve default at all. Refinancing a loan to secure better terms is a proactive financial strategy and also doesn't relate to defaulting. Understanding these distinctions is crucial for recognizing the implications of a loan default and its consequences for both borrowers and lenders.