What does the term default refer to in finance?

In finance, the term default specifically refers to the failure to pay back a loan according to the agreed-upon terms and conditions. This situation arises when a borrower does not make the scheduled payments—either the principal or interest—leading to serious financial implications for both the borrower and the lender. Default can occur with various types of loans, including mortgages, personal loans, and credit card debts.

When a borrower defaults, it can negatively impact their credit score and ability to acquire future credit, as lenders view default as a significant risk factor. Furthermore, in cases of severe default, lenders may initiate legal action or repossession of collateral, if applicable. This defines the urgency of making timely payments to avoid default situations. The other choices pertain to different financial actions that do not align with the direct definition of default in a borrowing context.