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 reassess how to spend the month’s budget, and you might be wondering what happens if you don’t make payments on a personal loan.
In this post, we’ll share the potential consequences of not paying back a personal loan.
What can happen if you miss one payment, of course, is quite different from what can happen if you miss several, so we’ll take you through possible ramifications along the spectrum.
What Does It Mean to Default on a Personal Loan?
Just as with a mortgage or student loans, defaulting on a personal loan means you’ve stopped making payments according to the loan’s terms. You might be just one payment behind, or you may have missed a few. The point at which delinquency becomes default with a personal loan — and the consequences — may vary depending on the type of loan you have, the lender, and the loan agreement you signed.
How Does Loan Default Work?
Even if you miss just one payment on a personal loan, you might be charged a late fee. Your loan agreement should have information about when this penalty fee kicks in — it might be just one day or a couple of weeks — and whether it will be a flat fee or a percentage of your monthly payment.
The agreement also should tell you when the lender will get more serious about collecting its money. Because the collections process can be costly for lenders, it might be a month or more before yours determines your loan is in default. But at some point, you can expect the lender to take action to recover what they’re owed.
What Are the Consequences of Defaulting on a Personal Loan?
Besides those nasty late fees, which can pile up fast, and the increasing stress of fretting about a debt, here are some other significant consequences to consider:
Damage to Your Credit
Lenders typically report missing payments to the credit bureaus when borrowers are more than 30 days late. Which means your delinquency will likely show up on your credit reports and could cause your credit scores to go down. Even if you catch up down the road, those late payments can stay on your credit reports for up to seven years.
If you actually default and the debt is sold to a collection agency, it could then show up as a separate account on your credit reports and do even more damage to your scores.
Though you may not feel the effects of a lower credit score immediately, it could become a problem the next time you apply for new credit — whether that’s for a credit card, car loan, or mortgage loan. It could even be an issue when you try to rent an apartment or need to open new accounts with your local utilities.
Sometimes, a lender may still approve a new loan for borrowers with substandard credit scores, but it might be at a higher interest rate. This means you’d pay back more interest over the life of the loan, which could set you back even further as you work toward financial wellness.
Dealing with Debt Collectors
If you have a secured personal loan, the lender may decide to seize the collateral you put up when you got the loan (your car, personal savings, or some other asset). If it’s an unsecured personal loan, the lender could come looking for payment, either by working through its in-house collection department or by turning your debt over to a third-party collection agency.
Even under the best conditions, dealing with a debt collector can be unpleasant, so it’s best to avoid getting to that stage if you can. But if you fall far enough behind to be contacted by a debt collector, you should be prepared for some aggressive behavior on the part of the collection agency. These agents may have monthly goals they must meet, and they could be hoping you’ll pay up just to make them go away.
There are consumer protections in place through the Fair Debt Collection Practices Act that clarify how far third-party debt collectors can go in trying to recover a debt. There are limits, for example, on when and how often a debt collector can call someone. And debt collectors aren’t allowed to use obscene or threatening language. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau.
You Could Be Sued
If at some point the lender or collection agency decides you simply aren’t going to repay the money you owe on a personal loan, you eventually could end up in court. And if the judgment goes against you, the consequences could be wage garnishment or, possibly, the court could place a lien on your property.
The thought of going to court may be intimidating, but failing to appear at a hearing can end up in an automatic judgment against you. It’s important to show up and to be prepared to state your case.
A Cosigner Could Be Affected
If you have a cosigner or co-applicant on your personal loan, they, too, could be affected if you default.
When someone cosigns on a loan with you, it means that person is equally responsible for paying back the amount you borrowed. So if a parent or grandparent cosigned on your personal loan to help you qualify, and the loan goes into default, the lender — and debt collectors — may contact both you and your loved one about making payments. And your cosigner’s credit score also could take a hit.
Is There a Way to Avoid Defaulting on a Loan?
If you’re worried about making payments and you think you’re getting close to defaulting — but you aren’t there yet — there may be some things you can do to try to avoid it.
Reassessing Your Budget
Could you maybe squeak by and meet all your monthly obligations if you temporarily eliminated some expenses? Perhaps you could put off buying a new car for a bit longer than planned. Or you might be able to cut down on some discretionary expenses, such as dining out and/or subscription services. This process may be a bit painful, but you can always revisit your budget when you get on track financially. And you may even find there are things you don’t miss at all.
Talking to Your Lender
If you’re open about your financial issues, your lender may be willing to work out a modified payment plan that could help you avoid default. Some lenders offer short-term deferment plans that allow borrowers to take a temporary break from monthly payments if they agree to a longer loan term.
You won’t be the first person who’s contacted them to say, “I can’t pay my personal loan.” The lender likely has a few options to consider — especially if you haven’t waited too long. The important thing here is to be clear on how the new payment plan might affect the big picture. Some questions to ask the lender might include: “Will this change increase the overall cost of the loan?” and “What will the change do to my credit scores?”
Recommended: How Deferred Payments Impact Credit Scores
Getting a New Personal Loan
If your credit is still in good shape, you could decide to get proactive by looking into refinancing the old personal loan with a new personal loan that has terms that are more manageable with your current financial situation. Or you might consider consolidating the old loan and other debts into one loan with a more manageable payment.
This strategy would be part of an overall plan to get on firmer financial footing, of course. Otherwise, you could end up in trouble all over again.
But if your income is higher now and/or your credit scores are stronger than they were when you got the original personal loan, you could potentially improve your interest rate or other loan terms. (Requirements vary by lender.) Or you might be able to get a fresh start with a longer loan term that could potentially lower your payments.
If you decide a new personal loan is right for your needs, the next step is to choose the right lender for you. Some questions to ask lenders might 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 you charge any loan fees or penalties?
• What happens if I can’t pay my personal loan because I lost my job? Do you offer unemployment protection?
Shopping for a personal loan online can be fast and convenient. With a SoFi Personal Loan, for example, you can find your interest rate in minutes without impacting your credit score.* And with SoFi, you’ll have access to live customer support seven days a week.
Is There a Way Out of Personal Loan Default?
Even if it’s too late to avoid default, there are steps you may be able to take to help yourself get back on track.
After carefully evaluating the situation, you may decide you want to propose a repayment plan or lump-sum settlement to the lender or collection agency. If so, the Consumer Financial Protection Bureau (CFPB) recommends being realistic about what you can afford, so you can stick to the plan.
If you need help figuring out how to make it work, the CFPB says, consulting with a credit counselor may help. But consumers should be cautious about companies that claim they can renegotiate, settle, or change the terms of your debt: the CFPB warns that some companies promise more than they can deliver.
Finally, as you make your way back to financial wellness, it can be a good idea to keep an eye on two things:
1. The Statute of Limitations
For most states, the statute of limitations — the period during which you can be sued to recover your debt — is about three to six years. If you haven’t made a payment for close to that amount of time — or longer — you may want to consult a debt attorney to determine your next steps. (Low-income borrowers may even be able to get free legal help .)
2. Your Credit Score
Tracking your credit reports — and seeing first-hand what helps or hurts your credit scores — could provide extra incentive to keep working toward a healthier financial future. You can use a credit monitoring service to stay up to date, or you could take a DIY approach and check your credit reports yourself. Every U.S. consumer is entitled to a once yearly free credit report available at annualcreditreport.com , which is a federally authorized source.
If your debt seems daunting right now, and you’re struggling to make payments, some proactive planning could help you avoid falling so far behind that you default on your personal loan. That plan may include talking to your current lender about modified payment terms — or it might be time to consider a new personal loan to consolidate high-interest debt.
The good news is there’s help out there. And the sooner you act, the more options you may have to protect your credit and stay away from the serious consequences of defaulting.
*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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