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A personal loan can be helpful in some situations, but if you fall behind on payments, it can cause you a lot of financial trouble. If you default on a personal loan, your lender may sue you, charge steep late fees, affect your credit score, or all three.
Learn exactly what happens if your personal loan is not repaid in the following paragraphs. You’ll also discover how to resume your loan payments.
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A personal loan can be helpful in some situations, but if you fall behind on payments, it can cause you a lot of financial trouble. If you default on a personal loan, your lender may sue you, charge steep late fees, affect your credit score, or all three.
Learn exactly what happens if your personal loan is not repaid in the following paragraphs. You’ll also discover how to resume your loan payments.
Understanding the punishment for nonpayment of personal loans
It’s crucial to contact your lender as soon as possible if you experience a sudden financial setback, such as a job loss or a medical emergency, and find yourself unable to make payments on your personal loan. Most lenders are going to be open to collaborating with you to get your payments back on track.
But not everyone is proactive enough to contact their lender right away, which can result in personal loan default. For a thorough timeline of what occurs at each stage of the default process, keep reading.
| Timeline: Defaulting on a personal loan | |
| Days past due | What happens if you don’t pay |
| 0 to 30 days |
|
| 30 to 60 days |
|
| 60 to 90 days |
|
| 90+ days |
|
Days 0 to 30: The majority of lenders provide a grace period during the first 30 days after a missed payment, delaying reporting the missed payment to the credit bureaus.
It’s important to get in touch with your lender if you already know you won’t be able to make the payment even with a grace period. If this is the case, they will likely work with you to temporarily defer your payments or establish a payment plan.
Days 30 to 60: If you haven’t already contacted your lender, they will do so following your first missed payment and ask when they can expect the payment. You could be charged a late fee at this time.
The lender will typically get in touch with you about the default and inform the credit bureaus once your missed payment has been past 30 days. Even if this is your first missed payment, your credit score will probably suffer at this point and could decline significantly (by as much as 110 points).
Days 60 to 90: The lender will continue to get in touch with you and may provide advice on how to fix the personal loan default. When you are 60 days overdue, the lender will once more notify the credit bureaus that you were late, which will result in a further decline in your credit score.
90 days: Once you are 90 days overdue, the majority of lenders will either try to settle the debt with you or start legal action.
What happens when you default on a loan
Usually, defaulting on a loan means you haven’t made any payments for a while. Personal loan default is significant because it could harm your creditworthiness. Your credit score will suffer greatly, and you’ll probably have a hard time getting new credit for years. Additionally, you might have trouble locking in a reasonable interest rate even if you manage to obtain new credit.
The damage will get worse the longer you are late with payments. You can probably get back on track without too much long-term damage if you only miss one or two payments. However, if you haven’t made a payment in at least six months and are refusing to answer your lender’s calls, you might be digging yourself a hole that will be difficult to escape from.
There isn’t a one-size-fits-all punishment for nonpayment of personal loans. Whether a personal loan is secured or unsecured determines the specific consequences of defaulting on it. If the personal loan is secured, meaning it is backed by something like a car as collateral, this security may be seized if you fall behind on payments. The borrower may be subject to wage garnishment if the personal loan is unsecured, which most are.
Defaulting on a personal loan could result in:
Determining whether your debt is past the statute of limitations
The statute of limitations on debt is the time limit within which a creditor may bring legal action to recoup a debt. The duration will be determined by the type of debt and state laws in your area.
The statute of limitations for unsecured personal loans is typically three to six years, but in some states it can be as long as ten years.
It’s crucial to realize that, technically, even after the statute of limitations has run, you are still liable for the debt. The distinction is that the creditor can no longer seek recovery through litigation. However, if you pay off a debt that has passed the statute of limitations in any amount, you essentially start the clock over and reopen the possibility of legal action.
To figure out the statute of limitations on your personal loan debt, check with your state attorney general’s office or get in touch with a consumer debt or legal aid attorney.
How to get your personal loan back on track
There is still hope if you have fallen behind on your personal loan payments. Here are some pointers to help you get back on track and avoid being penalized for not repaying your personal loan:
When you realize you’ve missed a payment, getting in touch with your lender is the best course of action. Explain your circumstances and why you missed the payment.
Most likely, the lender will be able to set you up on a short-term payment schedule to assist you in getting back on track. For example, let’s say you missed two payments. Your lender may divide them up and include them in the subsequent six or twelve months’ worth of payments.
Sign up for a debt management plan
This is the route you’ll probably want to take if you’re committed to learning about wise financial practices while getting back on track. Working together with a credit counselor at a nonprofit credit counseling organization is part of a debt management plan. You’ll pay a payment to your credit counselor each month, who will then distribute it to your creditor(s). Your nonprofit credit counselor may occasionally be able to bargain with you on interest rates.
Many people appreciate how straightforward and efficient the debt management process is. Additionally, you’ll gain knowledge on how to develop sound financial practices while paying off debt. However, there may be an initial and ongoing charge for these plans.
Consider taking out a debt consolidation loan
With a debt consolidation loan, all of your debt is combined (i e. debt from credit cards, personal loans, and other sources) and repaying it with a new loan with different terms.
Debt consolidation loans do not eliminate your debt; you are still obligated to pay back the full amount. But they can simplify the repayment process and perhaps even help you avoid paying as much in interest.
Leverage the equity in your home
A home equity loan (HEL) or home equity line of credit (HELOC) can be obtained if you have a sizable amount of equity in your house. With this option, you might be able to get a lower interest rate and have more time to repay the loan because you’re using your own assets as collateral.
The disadvantage is that you are almost certainly switching from unsecured to secured debt. The repercussions of defaulting on a HEL or HELOC are severe; you run the risk of losing your home.
Borrow against your 401(k)
Although it is a possibility, many financial experts view taking out a 401(k) loan as a last resort. If you fail to pay back the loan, not only will you lose out on compound interest on any amount you borrow, but you also run the risk of having to pay more in taxes and possibly a penalty. However, those with poor credit or those who would simply prefer to avoid high interest debt may find this to be a viable option. Just keep in mind that some providers of 401(k) plans do not allow 401(k) loans.
In this article, we will go over 401(k) loans in greater detail.
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Unsecured loan default can have severe repercussions. Discover the potential consequences of defaulting and how to handle the aftermath.
A personal loan can be helpful in some situations, but if you fall behind on payments, it can cause you a lot of financial trouble. Here’s what to know….
The statute of limitations on debt, which determines how long you have before you can no longer be sued for unpaid loans, varies by state and type of debt.
FAQ
Can I get a personal loan if I have a default?
Find a personal loan even if you have unpaid defaults Savvy’s flexible lending partners can help you find personal loans even if you have unpaid defaults on your file.
Can you get a loan with bad payment history?
Even though it is possible to be approved for a personal loan even with bad credit, the lender you apply to ultimately has the final say. Some lenders will disclose their minimal requirements up front.
What happens if you take out a personal loan and don’t pay back?
Negative consequences of not repaying a personal loan include fees, penalties, defaulting on the loan, having your account turned over to collections, being sued, and a sharp decline in your credit score.
What are the consequences of defaulting on a personal loan?
A personal loan default could lead to: Difficulty obtaining credit in any form for years to come even if you manage to obtain credit in the future, it will be difficult to lock in a good interest rate. Wage garnishment, if the loan was unsecured. Seizure of assets, if the loan was secured.