|What does Default mean?
The term default has more than one explanation in the banking industry:
- It is the failure to pay either interest or principal without delay when it is due. Default usually occurs when an individual or firm is unable to pay a certain debt that one has a legal obligation to meet. The companies and individuals that borrow can default if they are unable to pay the owed sum, or if they are not willing to honor the debt. By defaulting on an obligation to a creditor, a firm or a person, can find him or herself in financial trouble. Creditors will see a borrower’s defaulting as a signal that the person owing them money will probably be unable to uphold his or her end of the agreement, in paying back the loan in the future. For instance, if a company is not able to make a coupon payment on the bonds they own, the bond holders place the company in bankruptcy. This means that the creditor company has the right to claim some of the borrower company’s assets as payment for the money owed.
- Failing to perform on a future contract, that is required by an exchange. By defaulting like this one party member is unable to fulfill some of the obligations mentioned in the respective contract. This normally means that the participants have not settled the agreement by a required date. An individual in the short position would default if he or she would fail to deliver on the promise of goods at the end of the deal, while the long position would defaults if he or she does not provide payment for the goods by the settled date.
If an individual fails to pay their debt on a credit card by the due date, creditors have the right to raise the interest rate to the default rate, which is otherwise known as penalty rate, or opt for decreasing the client’s credit line. In cases where the debts are serious, credit card issuers can take legal action against their delinquent consumers, in order to enforce payments or even to garnish wages.