Your car breaks down. Your furnace blows cold air. Your precious pup needs surgery—pronto.
Yep, life can be challenging when unexpected expenses pop up. When that happens, you may need to assess how to spend the month’s budget, and might be wondering what happens if you don’t make payments on a personal loan.
In this post, we’ll share potential consequences of not paying your personal loan. And what can happen if you miss one payment, of course, is quite different from what can happen if you miss several of them—and we’ll take you step by step through possible consequences along the spectrum.
Before we dive in, we’ve got to level with you: This is an incredibly complex topic. We’re going to try to break it down the best we can, but please understand that this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi always recommends that you speak to a professional about your unique situation.
Consequences of Late Payments
One of the earliest consequences might be that your credit score could drop, because one major factor in your score is typically your payment history. For your FICO® Score , how timely you make your payments accounts for as much as 35% of the score.
You may not feel the impact of a lower credit score immediately, but people often do when they apply for new credit—whether that’s for a credit card, car loan, or mortgage loan—or even when they need to turn on utilities in their new apartment.
How timely you make your payments accounts for as much as 35% of the score.
According to an article in US News and World Report , the first six months of missed payments could seriously impact your credit score—in fact, because of those six months, your credit score could drop as much as 100 points. And since the numerical span from an “exceptional” FICO Score (800 and up) to a poor one (579 down to 300) is only 221 points, a 100-point drop could be highly significant in your ability to obtain new loans.
Sometimes, a lender may still approve a new loan for borrowers with substandard credit scores, but at a higher interest rate. This means you’d pay back more interest over the life of the loan, which could set you even further back from the goal of financial wellness.
Then, if you become 60 days behind in your payments, that’s typically when lenders may start sending your accounts to a collection agency in an attempt to get their money. If you don’t respond to the collection agency and repay the debt, you will likely get calls from agencies.
And if the debt becomes 180 days in arrears, the lender may assume you don’t plan to repay at all, and you may get sued . If you lose the lawsuit, money owed could be taken out of your paycheck or garnished from your bank accounts or tax returns. Plus, collection agencies can keep on calling, and your credit report may continue to suffer.
What Happens Next?
Let’s say you’ve just been hit with an unanticipated expense, one large enough to cause you to scramble to figure out how to meet all of your monthly financial commitments. So, first ask yourself which of the following is true:
• This will be a short-term problem, perhaps one to three months in length.
• This will be challenging for me financially for a longer period of time.
If the first is true, you might find that, by creating a strategic budget to get yourself through this lean period, you might actually meet your expenses, after all. You can use a budget worksheet to list all of your:
• monthly expenses
• monthly income
Now, look to see what expenses you can eliminate for now. Strategies can include a short-term policy of no dining out (including fancy coffees!) and no discretionary purchases. Until you get past this bump in the road, find creative ways to entertain yourself without spending anything extra of significance.
For example, you could check out old black-and-white movies from the library, pop some popcorn, make some lemonade and invite friends over for a marathon of Abbott and Costello, or Charlie Chaplin or Douglas Fairbanks, Jr. and Mary Pickford. (And, if this makes you say, “who??” then you may discover brand new interests in these stars of yesteryear!) Consider turning expense cutting into a game and you may discover that you can weather this short-term financial challenge.
Plus, how much money do you have in savings? Could you, for example, use these funds to pay off whichever bill of yours has the lowest balance? If you do that, how much will that free up your monthly cash flow? Enough to get through the financial challenge?
If, after considering these strategies, you still can’t make ends meet, you can always talk to your lender(s). You could explain what you’ve figured out during your budgeting process—perhaps you’ve determined that your car repair is going to put you behind for two months.
Or let’s say, for example, you let your lender know how you take your financial repayment responsibilities seriously and would like to talk about any available options. Sometimes, the lender may work with you; whether this happens or not, it’s one approach to take.
Now, let’s consider what you can do if the unanticipated expense is going to have an impact on your budget for a longer amount of time. In this case, it’s especially important to get a crystal clear picture of your financial situation.
If you have good to excellent credit, it may make sense to see if you can consolidate credit cards and other qualifying debt into a personal loan. Consolidating multiple debts into one, especially if you can get a low interest rate, might give you a lower monthly payment—which might mean more breathing room in your budget. If this strategy sounds helpful, it’s important to make sure you follow through before you begin to miss payments on any outstanding loans.
Proactively Taking Out a Personal Loan
Once you’ve decided it’s time to take control of your budget and cash flow management, it can also be time to decide if you should apply for a personal loan as part of your overall financial strategy.
If you’ve got solid credit, among other financial factors, a personal loan might be the right strategy for:
• debt consolidation
• large purchases that serve as investments in your health
• home improvements
• large and/or unexpected medical bills
If you decide that a personal loan is right for your needs, the next step is to choose the right lender for you. Questions to ask of lenders include:
• Can I borrow enough for what I need?
• What is the best interest rate I can get? Can I get a better rate if I sign up for automatic payments?
• Do they charge any origination fees? Prepayment penalties? Application fees?
• What happens if I can’t pay my personal loan because I lost my job? Do they offer unemployment protection?
Personal Loans with SoFi
Applying for a personal loan at SoFi is fast and convenient. You apply online, and get access to live customer support seven days a week. You can find your rate in just two minutes—with no commitment—and without impacting your credit score.
A SoFi personal loan comes with no origination fees or prepayment penalties. You can get a fixed interest rate and a SoFi personal loan gives you access to member benefits like unemployment protections on your loan.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.