In financial terms, what does 'default' mean?

The term 'default' in financial contexts specifically refers to the failure to meet legal obligations associated with a loan. This can occur when a borrower does not make the scheduled payments as stipulated in the loan agreement or violates any other terms of the contract. Defaulting on a loan can lead to serious consequences, including damage to the borrower’s credit score, potential legal action from the lender, and the risk of losing collateralized assets.

In contrast, paying off a loan ahead of schedule is seen as a prepayment, which is the opposite of defaulting. A late payment on credit is a sign of potential default risk, but it does not constitute default itself unless it results in a formal declaration by the lender. Adjustments in interest rates are related to market fluctuations or lender policies but do not inherently connect to the idea of default. Understanding default is crucial for evaluating borrower risk and the stability of financial institutions.