What is a default on a loan?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A default is a failure to pay a loan or other debt as the agreement requires, such as missing repayments when they fall due. What follows depends on the agreement: the lender may add late penalties, pass the debt to a debt collector, or take ownership of an asset that was offered as security.
A missed repayment does not make the debt go away in the books. Check the lender's statements for interest and late fees, and reconcile the loan account to investigate any differences. Your accountant can confirm the amounts and timing to record, including interest or fees that may need to be accrued before a statement arrives.
Default works in the other direction too. When a customer fails to pay an invoice, the amount stays in accounts receivable while it is followed up. How a debt that may never be collected is treated in the accounts is a question for your accountant.
In Australia
business.gov.au's glossary describes a default as not paying a loan or another debt obligation. It uses repossession for a bank or other lender taking over property or assets to clear a loan that is in default, and explains that the loan-to-value ratio helps a lender judge whether it could recover the amount lent if the borrower defaults.
Its guide to business loans says a lender can claim the security on a secured loan to recover its money if the loan is not repaid. Its page on the warning signs of financial trouble says a weaker financial position raises the risk of a business defaulting on its debts.
Its guide to managing debt suggests speaking to creditors early: explaining your circumstances, asking about hardship provisions, a later due date, a part-payment or a payment plan, and keeping a record of each conversation.
Worked example
| Date | Item | Amount (AUD) | Balance (AUD) |
|---|---|---|---|
| 1 Jul 2026 | Opening balance | 12,400.00 | |
| 15 Jul 2026 | Repayment due, not paid | 0.00 | 12,400.00 |
| 15 Jul 2026 | Late fee charged by the lender | 45.00 | 12,445.00 |
| 1 Aug 2026 | Interest charged | 62.00 | 12,507.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Recording a repayment in the books because it was scheduled, when the money never left the bank account.
- Ignoring late fees and penalty interest on the lender's statement, so the books show less owing than the lender says.
- Keeping no notes of conversations with a lender about missed payments or new arrangements.
Related terms
Related service
Accounts payable and receivable
Bills and invoices tracked, with you approving every payment.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Warning signs your business is in financial trouble
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage being in debt
business.gov.au, Australian Government. Current at 16 October 2026, released 20 February 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.