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What Happens When You Default on a Personal Loan?

Updated on:
Content was accurate at the time of publication.

Missing payments on a personal loan can have serious consequences. 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.

Keep reading to learn more about what happens when you default on a loan.

As far as what you can expect to happen when you default on a loan, there is no one-size-fits-all answer. The process can vary depending on the terms outlined in your unique loan agreement. However, the steps outlined below can give you a general idea of what to anticipate if you start missing payments.

0 to 30 days

Lenders typically don’t report a late payment to the credit bureaus until one full billing cycle has passed, which is usually around 30 days. This time is known as a “grace period.” However, you may still incur late fees during this period.

Late fees can either be a flat charge or a percentage of the loan amount. Typically, they can range anywhere from $10 to 5% of the past due amount.

30 to 90 days

After 30 days, your lender will likely report the missed payment to the credit bureaus, and you’ll begin to see a negative impact on your credit score. If multiple payments are more than 30 days late, each one will be reported to the credit bureaus as a separate occurrence.

Missed payment information can remain on your credit report for up to seven years.

90 to 120 days

While the exact timing depends on your loan agreement, after a few months of missed payments, your loan will transition from being in delinquency to being in default.

Defaulting on a loan means that you’re failing to repay the loan per the terms outlined in your loan agreement.

120 days or more

After 120 days or so, your debt will likely be “charged off” by the lender. Charging off debt involves the lender considering the account a loss and removing it from their books.

Keep in mind that you’ll still owe any debts that have been charged off. The debt will simply have been sold to a collections agency or debt collector. At this point, it will be up to the collections agency or debt collector to collect payment from you rather than your original lender.

Now that you know what the timeline looks like if you miss payments on a personal loan, it’s a good idea to learn how you’ll be affected if your account goes into default.

Defaulting on a secured loan

If you’ve taken out a secured personal loan — or a personal loan that is guaranteed by collateral — the consequences of default are a bit more severe than for unsecured debt. In this case, once you’ve missed a few payments, your lender has the right to repossess the asset that you’ve used to back the loan.

In some cases, the lender might not even be required to get a court order in order or inform you before repossessing your asset. However, this route is more common with auto loans and car title loans than secured personal loans. In others, particularly where a savings account or certificate of deposit (CD) secure the loan, the money will simply be withdrawn from the account.

In either scenario, it’s crucial to realize that going through a repossession does not protect your credit score. Any missed payments will still be reported to the credit bureaus, and you’ll see your score drop accordingly.

Defaulting on an unsecured loan

The vast majority of personal loans are unsecured. Unlike with secured loans, this means that there is no asset that the lender can repossess.

As a result, your credit score will absorb the majority of the impact from any missed payments. Then, once your account goes to collections, the collections agency has the right to sue you for the money you owe. If necessary, they can also get a court order to garnish your wages or put a lien on any assets you own, such as your home.

How defaulting on a personal loan affects your credit

Missed payments will have a dramatic impact on your credit score because payment history is the largest factor that makes up your credit score. It accounts for 35% of your overall FICO score and 40% of your VantageScore. As a result, even one missed payment can damage your score by almost 100 points if you have good or excellent credit.

Missed payment information can also impact your financing ability for the long haul. Although its impact on your score will diminish over time, late payment information stays on your credit report for seven years. Lenders can access this information, and it may make it harder to be approved for financing in the future.

Whether you think you may be at risk for missing payments or you’ve already defaulted on a loan, you should know that there are options available to you to lessen the impact on your credit score. Here’s an overview of what you can do:

  • Contact your lender: The best way to avoid defaulting on a loan is to be proactive and call your lender to explain your situation before you miss a loan payment. If you’re experiencing financial hardship, your lender may be able to offer some debt restructuring options, such as payment deferral or loan modification.
  • Talk to a credit counselor: Credit counseling agencies can help you negotiate with your creditors and form a plan to pay them back. If you think you might need help negotiating, consider reaching out to an agency near you. For best results, choose an agency that’s affiliated with the National Foundation for Credit Counseling (NFCC).
  • Learn about your rights: When your debt is in collections, you’re afforded certain rights under the Fair Debt Collection Practices Act. For example, debt collectors aren’t allowed to abuse or harass you. Take some time to familiarize yourself with the act so that you know your rights. If you feel that a debt collector has broken the law, consider filing a complaint against them with the Consumer Finance Protection Bureau (CFPB) or your state’s attorney general.
  • Hire a lawyer: When you’re facing a default judgment, you’ll likely need to appear in court to avoid having the judge automatically side with the debt collector or lender. In this case, it’s best to reach out to a lawyer for assistance.