What Happens If You Don’t Pay Back a Personal Loan?

Most people borrow money with the full knowledge that they’ll have to pay it back, yet a range of life circumstances can make doing so challenging. This possibility may lead you to wonder what actually happens if you’re unable to pay back a personal loan.

This depends on the type of personal loan (i.e., secured or unsecured), in addition to how late your payments are. Ultimately, you can expect damage to your credit score and a range of financial consequences to come into play.

Key Takeaways

  • Failing to make payments on a personal loan will result in negative information being listed on your credit reports for at least seven years.
  • However, you may not see much effect from late payments for the first 30 days. Most negative impacts from late payments on a personal loan happen after you’re at least 30 days late.
  • Letting your account move from delinquency into default (usually 90 to 120 days) can also lead to other negative consequences, including collection calls, the potential for lawsuits, a lien on your home, or even garnishment of your wages.
  • Ultimately, you should strive to avoid missing loan payments by reaching out to your lender to ask about hardship programs or refinancing or consolidating your debts.

What Happens When You Miss a Personal Loan Payment?

What happens when you miss a loan payment changes the longer you’re delinquent. Here’s a rundown of what you can expect for each 30-day threshold that you fail to make loan payments.

30 Days Past Due

For the first 30 days after you miss a personal loan payment, you may not see any impact to your credit score or receive much correspondence over the missed payment. That’s because, generally speaking, lenders don’t report late payments on accounts until at least one billing cycle has passed.

That said, you may see a late fee added to your personal loan balance. These fees can vary depending on your lender and the details listed in your loan documents.

30–60 Days Past Due

Once your late payment has been reported to the credit bureaus, your account is considered delinquent, and you’ll likely see your credit score take a hit. According to the Consumer Financial Protection Bureau (CFPB), negative information reported to the credit bureaus can stay on your credit reports for at least seven years.

60–90 Days Past Due

Once your loan payment is 60 to 90 days past due, your lender will continue to send you statements and request payment. Your late payments will also continue being reported to the credit bureaus every 30 days on the days when each payment is due.

90-120 Days Past Due

At some point from 90 to 120 days past due, your lender will stop reporting your account as delinquent and start reporting it as being in default. This information is added to your credit reports, which means that the damage you see to your credit score may get progressively worse.

After 120 Days Past Due

According to Equifax, lenders typically “charge off” accounts in default after a payment has not been made for at least 120 days. Ultimately, this means that the lender has given up on the prospect of collecting payment from you, and that they plan to sell your account in default to a third-party company, usually a collection agency.

Once your account is with collections, the agency will attempt to collect payment from you and potentially even sue you for whatever you owe. The agency may even try to put a lien on any assets you have to help satisfy the debt, or they may attempt to garnish your wages through the court system.

The negative reporting from late payments will also show up twice on your credit reports at this point—once with the original lender, and another time with the collection agency. This information may also stay on your credit reports for seven years, causing significant damage to your credit score the entire time unless it’s resolved.

Defaulting on a Secured Loan

If your personal loan was secured with collateral, you can also expect your lender to repossess the assets you used as collateral after you miss a few payments. Note that, with some types of repossession, your lender is not required to notify you or get an order from the court system ahead of time. This scenario is more common with auto loans than secured personal loans. However, this can also happen when you use a car title as collateral for a personal loan.

Some secured personal loans also use cash in a connected savings account or certificate of deposit (CD) as collateral for the loan. In the case of failure to repay, the amount kept in savings would be kept by the bank to satisfy the loan.

In either scenario, losing your collateral due to nonpayment does not mean you’re safe from damage to your credit score. Late payments and delinquency will continue being reported to the credit bureaus.

Defaulting on an Unsecured Loan

If your personal loan is unsecured, which is the more likely scenario with a personal loan, the lender doesn’t have any collateral to seize if you fail to repay.

As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order.

How Does Defaulting on a Personal Loan Affect Your Credit?

How you handle your personal loan can have a dramatic impact on your credit score, since your payment history is the most important determining factor of both FICO credit scores and scores that use the VantageScore scoring model.

Late payments and accounts in default stay on your credit reports for seven years, meaning you may face financial consequences for years to come. Not only will your credit score likely plummet, but lenders who see this information on your credit reports are much less likely to approve you for a new loan in the future.

How Can You Avoid Defaulting on a Personal Loan?

While there are situations where defaulting on a personal loan is unavoidable, you should take steps to save yourself from this hardship if you can. Consider the following tips if you’re on the verge of missing a loan payment:

  • Contact your lender right away. Reach out to your lender to see if they have any options that can help you, such as a hardship program. Your lender may also let you change your due date to give you a little more time.
  • Look for areas of your budget that you can cut. See if you can cut back on spending in discretionary categories like dining or entertainment to free up cash for your loan payment. This may not be a long-term solution, but it might buy you some time.
  • Look into loan refinancing or debt consolidation. See if refinancing your personal loan makes sense or if debt consolidation could help you get a lower interest rate, a lower monthly payment, or both.
  • Reach out to a credit counseling agency. Finally, consider reaching out to a nonprofit credit counseling agency for help or advice. These firms can help you get lower interest rates and a better monthly payment, and they can stop or prevent collection calls.

Can You Lose Your House with a Personal Loan?

If you have a secured personal loan (with your house acting as collateral) and you fall behind on your payments, your lender may repossess your home to repay your debt. Even if your loan is unsecured, should it end up in default, there’s always the possibility that a lien will be placed on your home until the debt is repaid.

The Bottom Line

Failing to repay a personal loan can cause considerable damage to your credit score that lasts for years, and this could impact your life in more ways than one. For example, seeing your credit score drop may make it more difficult to qualify for a home loan, and you may wind up paying higher insurance rates along the way. Since employers can ask to see a modified version of your credit reports for hiring purposes, not paying back a personal loan could even lead to missing out on a job you really wanted.

Ultimately, it’s better to stay on top of your loan payments and avoid damage to your credit if you can. This may mean cutting back on other expenses for a while, at least until you can get back on track.

Article Sources
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  1. Equifax. “When Does a Late Credit Card Payment Show Up on Credit Reports?

  2. Consumer Financial Protection Bureau. “How Long Does Negative Information Remain on My Credit Report?

  3. Experian. “When Do Late Payments Become Delinquent?

  4. Equifax. “What Is a Charge-Off?

  5. Consumer Financial Protection Bureau. “Can a Debt Collector Garnish My Bank Account or My Wages?

  6. Federal Trade Commission, Consumer Advice. “What to Know About Payday and Car Title Loans.”

  7. Experian. “How Secured Loans Can Help Your Credit.”

  8. myFICO. “What’s in My FICO® Scores?

  9. VantageScore. “The Complete Guide to Your VantageScore.”

  10. myFICO. “Home Purchase Center.”

  11. National Association of Insurance Commissioners, Center for Insurance Policy and Research. “Credit-Based Insurance Scores.”

  12. Consumer Financial Protection Bureau. “I’ve Been Looking for a Job. What Do Employers See When They Do Credit Checks and Background Checks?

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