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Default Rate
What Is a Default Rate?
A default rate is a higher interest rate that may apply after a borrower fails to meet loan terms.
It often activates after:
- Missed payments
- Breach of agreement
- Loan default
Default rates are designed to compensate lenders for increased risk.
Why Default Rates Matter
Once triggered, a default rate can:
- Significantly increase interest costs
- Accelerate total repayment burden
- Make debt harder to manage
For example:
- Original rate: 7%
- Default rate: 18%
The financial impact can be substantial.
Credit agreements outline default rate terms clearly before signing.
Default Rate vs. Penalty APR
On credit cards, a default rate may be called a penalty APR.
Both increase borrowing costs after missed payments.
FAQs About Default Rates
Are default rates permanent?
Not always. Terms vary.
Do all loans have default rates?
No, but many credit products do.
Can I reverse a default rate?
Sometimes, after consistent on-time payments.
Related Terms
