If you default on your personal loan, you may enter a world of debt collectors and garnished wages. Instead, try talking to your lender first.
Nobody (okay, very few people) takes out a personal loan with the intention of defaulting it. Failing to repay can result in accruing late fees or getting hounded by debt collectors. Does that sound like something you want to sign up for?
Yet, it can happen due to job loss, an unexpected medical emergency car repair that ends up capsizing your budget, etc. Regardless of the reason, you might end up in a position where you’re not just behind on your loan payments, but you, also, aren’t able to repay your loan obligation (for more on personal loans, check outthe OppU article "What is a Personal Loan?").
Here’s what happens when you can’t pay back your personal loan…
Racking up late fees.
The first thing that may happen when you miss your due date for a loan payment is the accrual of a late fee. This fee will be an additional amount to be paid onto your existing loan. The amount of the fee may vary, however, that information should be available on your loan agreement or on your lender’s website.
If you’re able to get back on track with your loan payments, these late fees will be incorporated into your total repayment obligation. They will likely be added onto what you owe on your next payment. If you’re able to pay that larger amount, you’ll be back on track. Well, mostly...
Damage to your credit score.
If you miss a payment, it may be reported to the bureaus, and this may negatively affect your credit score. One late payment can do some hefty damage to your score, and a few missed payments within a short period may cause more havoc. The more payments you miss, the closer you get to…
Defaulting on your loan.
Defaulting on a loan indicates that you have failed to fulfill the obligation per your loan agreement. Once you default, your creditor knows that you are unable to repay the loan. They may then switch into collections mode, either sending you to an in-house collection team or selling your debt to an outside debt collector.
At what point your loan will go from “behind in payments” to defaulted is uncertain as the point of default is different depending on the laws in your state and the terms of your loan. One lender may give you 90 days or more before declaring a default, while others may call it after 30 days.
Debt collectors calling you.
The job of a debt collector is to get you to repay as much of your unpaid debt as possible. While there are many ethical debt collectors, there are some who may use unethical and illegal tactics to make you pay the unpaid debt. Learn more about your debt collection rights in our article, What Debt Collectors Can and Can’t Do.
Rather than ignoring a debt collector's calls, you should talk to them and do your best to negotiate. Most collectors may be willing to settle for a reduced amount rather than pressuring you for the entire debt. Try and settle for a smaller amount. That way you can close the account and move forward.
Going to court and having your wages garnished.
This is another good reason not to avoid a debt collector’s calls. In certain situations, if a debt collector (or the original lender) is unable to get you to pay at least a portion of what you owe, there’s a very good chance that they may seek a legal remedy. They may take you to court and seek a garnishment on your wages. This means a portion of your income may be deducted from every paycheck to be paid until your debt is satisfied. Be warned: the amount you owe could also include court fees, making it even harder to get out of debt.
Talk to your lender.
While no lender likes to get a call from a customer saying that they won’t be able to repay their loan obligation as agreed, that doesn’t mean that they won’t be able to provide them assistance (although it does not mean they will be willing to help, but it doesn’t hurt to try). Give them a call, explain your situation, and inquire if there is anything they can do to assist you.
Maybe it’s as simple as changing your monthly due date so that it doesn’t overlap with your other bills. Additionally, you can request a lower interest rate or refinancing to decrease your monthly payments. Whatever solution you are able to agree upon, it is preferable than defaulting on your loan and damaging your credit score.
FAQs
After you fail to make a few payments, your loan will be considered in default, which essentially means that you've failed to follow through on the terms of your loan agreement. Once you're in default, you can be contacted by debt collectors and even be asked to appear in court.
What happens if you can't pay off a personal loan? ›
When you stop paying a personal loan, it could result in your account going into default, the balance being sent to collections, legal action against you and a significant drop in your credit score. If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.
What if I am not able to repay my personal loan? ›
Legal action: If you continue to default on your personal loan, the lender may initiate legal proceedings to recover the outstanding amount. This may include filing a civil lawsuit, which can result in a court order directing you to repay the loan.
What happens if I can't afford to pay a loan? ›
Collection agencies may get involved. The longer you leave a loan unpaid, the more likely it is that your lender can pass your debt to a collection agency. And if you fail to respond to a collection agency with your lender's requests, your lender can take you to court. Your property could be repossessed.
What happens if you borrow money and can't pay it back? ›
Legal Actions and Lawsuits
The lender or collector can garnish your wages or benefits to pay the debt or place liens on your property. If you have a money judgment against you and ignore an order to appear in court, a judge may issue an arrest warrant. Never ignore a court order and appear in court when necessary.
Can you get in trouble for a personal loan? ›
If you don't repay a personal loan, it can have a heavy impact on your credit score and can bring legal trouble into your life. Typically, personal loans have a 30-day grace period until your lender reports a missed payment to one or more of the credit bureaus.
Is it a crime to not pay back a personal loan? ›
You can't be sent to jail specifically for failing to repay a personal loan. You could be sued by a creditor, however, and if you don't show up in court or you fail to make payments ordered by a judge, you could face jail time for that infraction.
What happens to unpaid personal loan debt? ›
Personal loan default consequences
Once your loan is officially in default, the lender either moves the unpaid loan balance to an in-house collections department or sells it to a third-party debt collector.
What happen if I Cannot pay my loan? ›
If you fail to return your debt, the lender may sue you in court. The court will then order that you repay the full amount or risk other penalties such as wage garnishment or asset seizure. If payments are late, the lender may report the loan to credit bureaus and send debt collectors after you.
What should I do if I can't pay my loan? ›
Ask for a reduction in (or postponement of) your repayments for period of time. If the creditor agrees, confirm the agreement in writing. Keep a copy of the letter. If the creditor will not agree, you should keep making some of your repayments (if you can) and get advice from a financial counsellor.
In most cases, you can request deferment by contacting your lender and explaining your financial hardship. To evaluate the request, lenders typically require supporting documentation, such as proof of unemployment or medical bills. If approved, you will be granted a temporary reprieve from making regular loan payments.
What if I don't have money to pay a loan? ›
Under section 138 of the Negotiable Instruments Act 1881, the lender has the prerogative to file a case against you in court and demand their money back. Also, if you identify as a wilful defaulter, the lender can press criminal charges under sections 403 and 415 of the IPC, 1860 against you.
What happens if you owe money and can't pay? ›
Creditors might start debt collection.
You could even be sued for repayment. If the company wins, it might be able to garnish your wages or put a lien on your home.
How long can you go without paying back a loan? ›
Your loan servicer will tell you how many months remain in your grace period and when repayment will begin. The length of a grace period is typically six months, but it can vary depending on the type of loan you received. The promissory note you signed for your loan tells you the length of your grace period.
Is it illegal to default on a loan? ›
Defaulting on a loan is not a crime. Lenders don't have legal jurisdiction to arrest you for an overdue balance. However, defaulting on a loan will have serious financial implications.
What happens if I default on my personal loan? ›
If you have defaulted on an unsecured personal loan, the lender may freeze your account and send you reminders of your missed payments. Typically, after 120 to 180 days, the lender can charge off your account and sell your debt to a collection agency.
What happens if you can't pay a private loan? ›
Private lenders may attempt to collect on your debt directly, or they may hire collection agencies to try to collect on your debt. In addition, they may take you to court within the statute of limitations.
What happens to personal loans when a bank fails? ›
Your repayment term, interest rate and outstanding balance should all remain the same. When a lender fails, whether it's a bank or another financial institution, the first thing that happens is that its assets are sold in order to pay off creditors. Loans and other accounts are considered as part of those assets.
