Personal Loans

What Happens If Your Personal Loan Is Not Repaid?

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You took out a personal loan years ago. At the time, it was a great idea — you had excellent credit and were able to secure a good interest rate. But then an unexpected life event happened. You’re now several months behind on payments and wondering, What happens if my personal loan is not paid?

Keep reading to learn what happens if you default on a loan, plus ways to get back on track with payments.

What happens if you don’t pay back your personal loan

If you’re hit with a sudden financial setback like job loss or a medical emergency and can no longer make payments on your personal loan, it’s important to call your lender right away. Most lenders will be willing to work with you in order to get your payments back on track.

However, not everyone has the foresight to call their lender right away, which can lead to personal loan default. Continue reading for a detailed timeline of what happens at each stage of the default process.

Timeline: Defaulting on a personal loan
Days past due What happens
0 to 30 days
  • You are delinquent on your payment. You may be assessed a late payment, though most creditors will offer a grace period without fees or penalties.
30 to 60 days
  • Your credit score will likely take a hit as you default on payment. Your lender will likely charge you a late fee and contact you if you haven’t reached out yet.
60 to 90 days
  • Your lender will likely continue contacting you. Your credit score will likely dip even further.
90+ days

Days 0 to 30: Most lenders will offer a grace period in the first 30 days following a missed payment. This means the lender will wait before reporting the missed payment to the credit bureaus.

If you already know you won’t be able to make the payment even with a grace period, it’s important to contact your lender and explain your situation — they will likely work with you to temporarily defer your payments or set up a payment plan.

Days 30 to 60: After your first missed payment, your lender will contact you (if you haven’t reached out yet) and ask when they can expect the payment. You could be charged a late fee at this time.

Once your missed payment goes past 30 days, the lender will typically contact you about the default and alert the credit bureaus. At this time, your credit score will likely take a hit. Your credit score could drop significantly — as much as 100 points — even if it’s your first missed payment.

Days 60 to 90: The lender will continue contacting you and perhaps offer suggestions for how the personal loan default can be resolved. Once you’re 60 days past due, the lender will again report that you were late to the credit bureaus and your credit score will drop again.

After 90 days: Once you are 90 days past due, most lenders will either attempt to settle the debt or begin the litigation process.

What happens if a personal loan is not paid for months or even years? If your debt is more than 90 days past due, you might want to look into the statute of limitations on debt in your state, which could determine that a lender can no longer take legal action to collect your debt.

What happens when you default on a loan

Defaulting typically means you’ve failed to make payments on a loan for several months. Personal loan default is a big deal, as it can have a deleterious effect on your creditworthiness. Not only will your credit score take a major hit, but you will likely struggle to secure new credit for years. And even if you can secure new credit, you will likely have trouble locking in a decent interest rate.

The longer you’re delinquent on payments, the worse the damage will be. If you only miss one or two payments, you can likely get back on track without too much long-term damage. But if you’ve missed payments for six months or more and you’re ignoring your lender’s calls, you could be digging yourself a hole that it will be hard to get out of.

There isn’t a one-size-fits-all punishment for nonpayment of personal loans. When it comes to personal loan default consequences, the specifics depend on whether the loan is secured or unsecured. If the personal loan is secured, meaning it’s backed by a form of collateral like a car, this collateral could be seized if you default. If the personal loan is unsecured — which most are — the borrower could face wage garnishment.

Defaulting on a personal loan could result in:

  • A significant drop in your credit score (as much as 100 points from just one missed payment).
  • Trouble securing credit in any form for years to come.
  • Difficulty locking in a good interest rate even if you’re able to secure credit in the future.
  • Wage garnishment, if the loan was unsecured.
  • Seizure of assets, if the loan was secured.

Determining whether your debt is past the statute of limitations

The statute of limitations on debt is the specific period of time during which a creditor can file a lawsuit to collect a debt. The time frame will depend both on the laws in your state and the type of debt.

For unsecured personal loan debt, the statute of limitations is typically between three and six years, although it can be up to 10 years in some states.

It’s important to understand that technically, you still owe a debt after the statute of limitations has passed. The difference is that the creditor can no longer take legal action to recoup it. If you make even a partial payment on a debt that is past the statute of limitations, you effectively reset the clock and reopen the possibility of legal action.

To figure out the statute of limitations on your personal loan debt, check with your state attorney general’s office, or get in touch with a consumer debt or legal aid attorney.

How to get your personal loan back on track

Contact the lender and work out a payment plan

The best thing you can do upon realizing you missed a payment is communicate with your lender. Explain your circumstances and why you missed the payment.

The lender will likely be able to put you on a temporary payment plan to help you get back on track. For example, let’s say you missed two payments. Your lender could break them up and add them to the next six or 12 months of payments.

Sign up for a debt management plan

If you’re committed to learning about healthy money habits while getting back on track, this is the path you’ll likely want to take. A debt management plan involves partnering with a credit counselor at a nonprofit credit counseling agency. Each month, you’ll make a payment to your credit counselor, who will then disburse that payment to your creditor(s). In some cases, your nonprofit credit counselor will also be able to negotiate your interest rates.

Many people like how simple and streamlined the debt management process is. An added bonus is that you’ll learn about how to incorporate good financial habits into your life while repaying your debt. However, these plans can come with a startup and monthly fee.

Consider taking out a debt consolidation loan

A debt consolidation loan involves combining all of your debt (i.e. personal loan debt, medical debt and credit card debt) and paying it off using a new loan with different terms.

Debt consolidation loans don’t erase your debt — you’ll still be responsible for repaying the full amount. But they can make the repayment process simpler and possibly save you some money on interest.

Leverage the equity in your home

If you hold significant equity in your home, you could borrow against your property by taking out a home equity loan (HEL) or home equity line of credit (HELOC). The potential benefits of this route are that you’ll likely be able to secure a lower interest rate, and because you’re borrowing against yourself, you’ll have more time to pay off the loan.

The downside is that you’re most likely trading in unsecured debt for secured debt. If you default on a HEL or HELOC, the consequences are dire — you risk losing the roof over your head.

Borrow against your 401(k)

Taking a 401(k) loan is an option, but many financial experts consider it a last resort. Not only will you miss out on compounding interest on any amount you borrow, but you risk being forced to pay more in taxes and possibly a penalty if you fail to repay the loan. However, this can be a viable option for low-credit borrowers or simply those who’d rather avoid high interest debt. Just keep in mind that some 401(k) plan providers do not permit 401(k) loans.

 

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