What Happens if You Default on a Personal Loan?

Defaulting on a personal loan generally happens after several consecutive missed payments, often around the 90-day mark, though the exact timeline depends on your lender and loan agreement.

Once you're in default, you can face late fees, penalty interest and collections activity, and a missed payment reported to the credit bureaus can generally stay on your credit report for up to seven years from the date of the original delinquency.

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Key Takeaways

• Default follows a general pattern, not a fixed countdown: Many lenders report a missed payment to credit bureaus around 30 days, consider the loan in default around 90 days and may send it to collections after about 120 days, though your exact terms depend on your loan agreement.

• Payment history drives your FICO score the most: It accounts for 35% of your score, the single biggest factor, so even one missed payment can cause a fast, meaningful drop that's harder to reverse the longer it goes unaddressed.

• Secured and unsecured loans default differently: Missing payments on a secured personal loan risks the collateral tied to it, while unsecured loans put your credit and finances at risk without an asset for the lender to seize.

• Calling your lender early is your best move: Ask about deferment, forbearance, a modified payment plan or refinancing before you fall behind, since your options are usually better before a loan is formally in default.

• Bankruptcy is a last resort, not a first step: Most personal loans are unsecured and can often be discharged in bankruptcy, but it's worth exhausting hardship options, debt consolidation or nonprofit credit counseling first.

What Happens When You Default on a Personal Loan?

Defaulting doesn't happen overnight. Lenders generally follow a step-by-step process when payments are missed, though the exact timing can vary by lender and loan agreement:

Here's what that timeline can mean for your finances and credit, in short:

• Your score can drop fast, and the mark can stick around for up to seven years.

• Late fees and penalty interest pile up the longer the balance goes unpaid.

• After about 120 days, the debt often moves to collections, which can escalate to legal action.

Your Credit Score May Drop

Payment history accounts for 35% of your FICO score, the largest single factor in the 300 to 850 range, according to myFICO. That means missing a payment can cause a fast, noticeable drop. A missed payment reported to the credit bureaus can generally stay on your report for up to seven years from the date of the original delinquency, which can make it harder to get approved for new credit and more likely you'll pay higher rates if you do.

If you're curious how a loan affects your score in the first place, check out our guide on if personal loans hurt your credit.

Late Fees and Penalty Interest Add Up

Missing loan payments typically result in late fees and, in some cases, penalty interest, which can make an existing balance harder to pay down the longer it goes unaddressed. Reviewing how loan terms affect the cost of credit can help you understand how quickly missed payments compound your total cost, and it's worth knowing what increases your total loan balance more broadly, even outside of default.

Your Debt Gets Sent to Collections

After around 120 days, many lenders send the debt to a collections agency, which takes over efforts to collect payment. If you don't pay, the agency could sue you for the amount owed, and a court judgment can allow it to garnish your wages.

Do Secured and Unsecured Loans Default Differently?

Yes. What happens after default depends heavily on whether your loan required collateral.

If your loan has a co-signer, they generally become responsible for missed payments if you can no longer make them. Their credit can take a hit alongside yours, and the lender may pursue them directly for repayment.

What Should You Do if You Can't Pay Your Loan?

If you don't think you'll be able to keep up with loan payments, contact your lender as soon as possible and explain your situation. Depending on the lender, you may be offered:

• Deferment or forbearance: A temporary pause or reduction in payments while you get back on track.

• A modified payment plan: Adjusted terms that lower your monthly payment to something more manageable.

• Refinancing: A new loan, potentially at a lower rate, that replaces your current one. Learn more about whether you can refinance a personal loan before you're at risk of missing payments.

• Nonprofit credit counseling: Low-cost and sometimes no-cost advice on managing your finances and avoiding default through options like nonprofit credit counseling. Some agencies charge setup or monthly fees, so ask upfront.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you.

Can You Settle a Personal Loan After Default?

If you can demonstrate financial hardship, you may be able to settle your personal loan debt after defaulting, meaning you pay less than you owe, often as a lump sum. Your best move is reaching out to your lender as early as possible to explore this option, though settlement may still be possible even after the debt has been sent to collections.

Settling can help you avoid further collections activity or a lawsuit, but your credit could still take a hit, and forgiven debt can sometimes carry tax implications, so weigh the trade-offs carefully.

Is Bankruptcy an Option if You've Already Defaulted?

It can be, though it's meant to be a last resort. Most personal loans are unsecured debt, which generally means they can be included in and discharged through bankruptcy, either through Chapter 7, which doesn't involve a repayment plan, or over a three- to five-year repayment plan under Chapter 13. Before considering this route, it's worth trying hardship programs, debt consolidation or nonprofit credit counseling first.

A Chapter 7 bankruptcy can stay on your credit report for up to 10 years, while a completed Chapter 13 case generally comes off sooner, around seven years. Read our comprehensive guide to learn more about personal loans in bankruptcy.

How To Avoid Defaulting on a Personal Loan

1. Create a budget and prioritize high-interest debt. Knowing exactly what you can afford to borrow and repay each month and tackling high-interest balances first can save money over the long run.

2. Look into debt consolidation or a 0% balance transfer. A debt consolidation loan can streamline multiple debts into one manageable payment, and a balance transfer card can offer breathing room, provided you can pay off the balance before the introductory period ends.

3. Consider a debt management plan through a nonprofit agency. Low-cost and sometimes no-cost resources, along with lender hardship programs in some cases, can help you get ahead of a growing balance.

4. Only borrow what you can realistically afford. Review your lender's personal loan requirements before you apply so you know what to expect.

5. Set up autopay or payment reminders. Automating your monthly payment can reduce the risk of an accidental missed payment, though you'll still want to keep enough money in your account to cover it.

6. Build an emergency fund. Aim to eventually cover three months of expenses, but even one month's worth of payments is a solid starting point.

7. Read your loan terms carefully before signing. Know whether there's a grace period and what late fees apply if you fall behind.

Common Mistakes

• Assuming nothing happens until exactly 90 days: Many lenders start reporting missed payments to credit bureaus well before that point, so your score can drop earlier than you expect.

• Avoiding your lender's calls: Lenders often have more flexible options before a loan is formally in default than after, so reaching out early tends to open more doors.

• Assuming settlement has no downside: Settling for less than you owe can still hurt your credit and may create a tax bill on the forgiven amount.

• Waiting until collections to ask about hardship programs: Deferment, forbearance and modified payment plans are usually easier to get before your account is sent to collections.

• Jumping straight to bankruptcy: It's an option, but hardship programs, debt consolidation or nonprofit credit counseling are usually worth trying first since bankruptcy can affect your credit for years.

If you're weighing whether to pay off a loan ahead of schedule instead, see whether early repayment of personal loans is worth it or explore ways to pay off a loan faster.

Considering Your Next Loan?

If you're rebuilding after a default or comparing options before you borrow again, MoneyLion can help you compare personal loan offers from top providers based on the information you share, so you can review rates, terms and fees before committing. Approval, rates and terms vary by lender, and MoneyLion can't promise a specific offer.

Bottom Line

Defaulting on a personal loan generally follows a pattern that moves from a credit bureau report around 30 days to potential collections and legal action after about 120 days, though your exact terms depend on your lender. Because payment history makes up 35% of your FICO score and a default can stay on your credit report for up to seven years, the best move is contacting your lender the moment you think you'll miss a payment.

Deferment, modified plans, refinancing and nonprofit credit counseling can all help you avoid default, and even after default, settlement or bankruptcy may still offer a path forward.

FAQ

Here are quick answers to common questions about defaulting on a personal loan.

Can you go to jail for not paying a personal loan?

You generally can't be arrested just for not paying a personal loan since that's a civil debt, not a criminal matter. However, if a debt collector sues you and a court issues an order you ignore, like a summons to appear, a judge could hold you in contempt, which can lead to arrest if you continue not to comply.

How long does a default stay on your credit report?

A default that's reported to the credit bureaus can generally stay on your report for up to seven years from the date of the original missed payment, which can make it harder to qualify for new credit or result in higher interest rates during that window.

Can you negotiate your loan after defaulting?

You may be able to negotiate with your lender after defaulting, and if the lender or collector is willing, you could try settling the debt for less than the full balance owed. Your lender or collector isn't required to agree to either, so it helps to have a clear sense of what you can realistically pay.

What happens if your loan goes to collections?

If your loan goes to collections, the agency takes over efforts to pursue repayment. If you don't pay, it can take legal action, including a lawsuit, to try to recover the money owed.

Can you remove a default from your credit report?

You can generally only remove a default from your credit report if it was reported in error. Otherwise, accurate information typically stays on your report for up to seven years from the date of the original delinquency.

Key Terms

Loan default: Failing to repay a loan according to the terms of your agreement. For most personal loans, this generally happens after a loan goes unpaid for an extended period, often around 90 days, though terms vary by lender.

Delinquency: The period when a loan payment is late but not yet in default. Lenders often report delinquency to credit bureaus once a payment is about 30 days past due.

Collections: When a lender sells or transfers your unpaid debt to a third-party agency that pursues repayment, often after around 120 days of missed payments.

Co-signer: A person who agrees to repay your loan if you miss payments. Their credit can take a hit alongside yours if the loan goes unpaid.

Wage garnishment: A court order that lets a creditor take part of your paycheck directly from your employer to repay a debt you owe, generally capped under federal law.

Secured loan: A loan backed by collateral, such as a vehicle or savings account, which a lender can seize if you default.

FICO score: A credit score ranging from 300 to 850, with payment history accounting for 35% of the total, the largest single factor.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau: Debt Collection

• Consumer Financial Protection Bureau: How Long Does Information Stay on My Credit Report?

• Consumer Financial Protection Bureau: What Is a Co-Signer?

• Consumer Financial Protection Bureau: Can I Be Arrested for an Unpaid Debt?

• U.S. Department of Labor: Fact Sheet #30, Consumer Credit Protection Act Wage Garnishment Limits

• myFICO: What's in My FICO Scores?

• U.S. Department of Justice: Overview of Bankruptcy Chapters

• Consumer Financial Protection Bureau: What Is a Judgment?

• Consumer Financial Protection Bureau: What Is Credit Counseling?

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