What happens if you don't pay back a personal loan?

10 AUGUST 2023

In this article, we will go over the repercussions of defaulting on a personal loan.What happens if you don't pay back a personal loan?

You might be unsure of what would occur if you stopped repaying a personal loan if you have one. After all, a personal loan is dependent on your written agreement to repay the loan to the lender. With a mortgage or car loan defaulting can result in the loss of your home or vehicle as collateral - but a personal loan is different.

The repercussions of defaulting on a personal loan can also be daunting but revolve more around damage to your credit score. A loan that does not require borrowers to have collateral is known as an unsecured loan. A personal loan is an example of this. Instead, a lender looks at your individual credit score to determine the risk of lending to you. As a result, qualifying for a personal loan requires a healthy credit score.

Where missing payments are concerned, there are two terms:

Loan delinquency

When a borrower skips a loan payment, it is considered delinquency and can lower their credit rating. The percentage of accounts that are delinquent in a portfolio is known as the delinquency rate.

Loan default

Failure to repay a debt in accordance with the terms outlined in the agreement constitutes a default.

The first day after a missed payment is often when a loan is deemed late, although lenders are frequently amenable to working with debtors and might even give them the chance to make a partial payment. The exact period of time varies by lender, but often a debt enters default when payments halt after a few weeks or months.

So what happens if you don't pay back a personal loan?

In the first 30 days

Once 30 days have passed, the lender will notify the credit bureaus about the missing payment on a personal loan. Bringing the account up-to-date before that can stop the late payment from harming your credit score. However, depending on your lender, you can be charged fees and penalties if your payment is even one day late.

Between 30 - 60 days

Your account is regarded as delinquent after your payment is at least 30 days overdue, and your lender may report the missing payment to credit bureaus. For up to seven years, this negative event will be present on your credit report.

Over 120 days

After six months of missed payments, a lender would normally write off your account. Your credit report will show a "bad debt," which means the lender has given up trying to recover the money from you. The lender typically sells the debt to a third-party collection agency instead. Although the lender stops trying to recover the debt from you, the collection agency now attempts to do so. The debt is regarded as a separate account once it is in the possession of a collection agency. If you don't pay, the collection agency may file a lawsuit. Depending on how the case turns out, the court may seize your property or garnish your income to recover the money you owe.

Do everything in your power to get your account current before it goes into default. Consider finding ways to extract more money out of your budget, coming up with creative ways to earn extra money, or, under extreme circumstances, borrowing money from a friend or relative. Contact the lender if you are having trouble obtaining the extra funds you require. Be forthright and inform them of your financial difficulties. They might be open to working with you to change the loan's conditions or establish a new repayment plan.

Having financial difficulties? Consider the following:

  • As far as possible avoid increasing your debt further. Get everyone's support for debt reduction by talking to your family.
  • Keep track of your spending by writing down every cent you spend. This can assist you in seeing where you can cut costs and where your money is going.
  • As you pay off one account, continue using that instalment amount to pay more on another debt.
  • Consider switching to a less expensive insurance option.
  • If necessary, seek professional advice.

Already falling behind? Consider a consolidation

A different loan might be more advantageous for you. Particularly for loans like credit cards and payday loans, consolidation with a personal loan might result in reduced interest rates and a smaller payment. Additionally, a new loan usually extends your repayment period.

Consider a consolidation that you would pay back over a period of three to five years. If you wait longer to pay, you can wind up paying more in interest. If you're getting rid of payday loans, you could easily come out ahead.