Default on a Loan Essay

Default on a Loan Essay

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The study defines “default” is a risk to the repayment history of borrowers where the borrowers are missed at least three installments in 24 months. This showed a symbol and indication of borrower behavior will actually default to cease all repayments. This definition does not mean that the borrower had entirely stopped paying the loan and therefore been referred to collection or legal processes; or from an accounting perspective that the loan had been classified as bad or doubtful, or actually written-off (Pearson & Greeff, 2006).
While, McMillion (2004) states that default is the risk where the borrower unable to pay the loans. Default risk increased if a borrower has large number of liabilities and poor cash flow. Therefore, people who are having a high default risk stand a greater chance of loan being denied.
Little empirical research has been carried out in the United Kingdom on everyday experiences of debt. Findings showed that socio demographic factors played a relatively minor role in debt repayment. In the study by Livingstone and Lunt (1992) found that attitudinal factor is the important predictors of debt repayment.
Repayment performance refers to the total loans paid on time as stated in the loan agreement contract. A study by Takroni (1980) defines failure to repay same as failed to comply with the contractual obligation. While, in the study by Godwin (1999) measures the indicator of a pending financial problem is late payments.

2.3 Household Income
In finance terms, household income is the combined income of all members of a household who jointly apply for credit. Household income is an important risk measurement used by lenders for underwriting loans. Livingstone and Lunt (1992) emphasizes that the disposable inc...


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...gency (CCMA) (2012), the main reasons people fail to pay a debt were poor financial planning (25%), high medical expenses (22%), business failures or slowdowns (15%), loss of control on the usage of credit cards (13%), and loss of jobs or retrenchments (10%). Therefore, Lea, Webley and Walker (1995) found that debt with economic, social and psychology factor are closely related.
In the study by Orr, Sporn, Tracy, and Huang (2011) most individuals suffering from financial hardship due to unemployment and almost half of their respondents failed to repay the loan. When an individual does not work that means they are no longer a source of income to earn a living what else to repay the loan. This is supported by Canner and Luckett (1990) found that the probability of loan delinquencies were positive with household unemployment, divorce, family size, and minority status.

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