In this article, we will go over the repercussions of defaulting on 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 circ*mstances, 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.
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FAQs
Once your loan is officially in default, the lender either moves the unpaid loan balance to an in-house collections department or sells it to a third-party debt collector. You may receive phone calls, letters, e-mails or text messages from the collection company to recover the debt.
What happens if I don't pay off my personal loan? ›
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.
What if a personal loan is not paid? ›
Missing loan repayments or defaulting on a loan can severely damage your credit score, making it difficult for you to secure credit in the future. Increased interest rates: Lenders may increase the interest rate on your personal loan in case of repeated missed payments or defaults.
What happens if you Cannot pay back the loan? ›
Miss loan payments and your lender could charge you penalty fees, as well as interest on the missed payments. This can also affect your credit score. Don't forget, you will need to pay the owed money back – it doesn't go away. Act now and talk to your lender – it's in their interest to listen and help you.
How do I get out of a personal loan? ›
6 ways to get out of debt
- Pay more than the minimum payment. Go through your budget and decide how much extra you can put toward your debt. ...
- Try the debt snowball. ...
- Refinance debt. ...
- Commit windfalls to debt. ...
- Settle for less than you owe. ...
- Re-examine your budget.
You can't be sent to jail specifically for failing to repay a personal loan. You could be sued by a creditor, however, and if you don't show up in court or you fail to make payments ordered by a judge, you could face jail time for that infraction.
Do unpaid loans ever go away? ›
Key takeaways
Generally, if you've missed a debt payment or have accounts in collections, it can stay on your credit profile for up to 10 years, depending on your situation.
Can you get in trouble for a personal loan? ›
If you don't repay a personal loan, it can have a heavy impact on your credit score and can bring legal trouble into your life. Typically, personal loans have a 30-day grace period until your lender reports a missed payment to one or more of the credit bureaus.
What happens if you can't pay a private loan? ›
Private lenders may attempt to collect on your debt directly, or they may hire collection agencies to try to collect on your debt. In addition, they may take you to court within the statute of limitations.
What happens if you get a loan and don't use it? ›
If you decide that you don't want or need a loan once you have received the funds, you have two options: Take the financial hit and repay the loan, along with origination fees and prepayment penalty. Use the money for another purpose, but faithfully make each monthly payment until the loan is paid in full.
As mentioned previously, however, a collection agency may try to sue you for the unpaid amounts you owe, attempt to garnish your wages, or place a lien on your home through a court order. 5 And, as with a secured loan, you can expect a serious impact on your credit score.
What if I default on my personal loan? ›
Defaulting on a personal loan can have immediate and long-term consequences on your financial future. Your credit score may drop, lenders may not approve you for new credit or you could face court action. You can take several steps to avoid default or dig out of it if you've already gotten behind on payments.
What happens if you ignore a debt collector? ›
Ignoring or avoiding the debt collector may cause the debt collector to use other methods to try to collect the debt, including a lawsuit against you. If you are unable to come to an agreement with a debt collector, you may want to contact an attorney who can provide you with legal advice about your situation.
What happens if you can't pay a personal loan back? ›
When you stop paying a personal loan, it could result in your account going into default, the balance being sent to collections, legal action against you and a significant drop in your credit score. If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.
What happens if I am unable to pay my personal loan? ›
What is the punishment or legal action against personal loan defaulters for non-payment of loan in India? Legal action against personal loan defaulters in India involves a civil lawsuit. Lenders can file a case in a civil court seeking repayment. Defaulters may face asset seizure or wage garnishment.
Can a personal loan be forgiven? ›
You can't have a defaulted loan forgiven, but defaulted loans may qualify for discharge, depending on the loan and the program.
What happens if you don't pay a private loan? ›
Private lenders may attempt to collect on your debt directly, or they may hire collection agencies to try to collect on your debt. In addition, they may take you to court within the statute of limitations.
What if I default on a personal loan? ›
Once a default has been reported to the credit bureaus, your credit score can decrease. It can take years to rebuild your credit history after a default. Additionally, the interest rate you agreed to when signing your personal loan may increase, causing you to owe even more money.
Do personal loans ever go away? ›
A personal loan can stay on your credit report anywhere from a few years to up to a decade, depending on how you managed your debt. Missed payments may remain on your report for seven years, while bankruptcies and closed accounts that you've paid in full could stay on your report for a decade.
Can you write off an unpaid personal loan? ›
The unpaid debt must be 100% worthless before you can deduct it. There must be no chance that the borrower can or will ever pay you back the amount of the loan. It is important to make a documented effort to collect your money with: Letters.
