What Happens If You Default on a Personal Loan?

Defaulting on a personal loan can damage your credit score and lead to both legal and financial trouble. If you aren't able to make payments, talk to your lender as early as possible to avoid default and work out a new plan.

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1. Your Credit Score May Drop

Payment history accounts for 35% of your FICO score, so missing a payment can cause your credit score to drop. A late or missed payment stays on your credit report for up to seven years. With a lower credit score, you'll have a harder time getting approved to borrow money. If you do get approved, you'll likely have to pay higher interest rates because lenders will see you as a bigger risk.

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2. Late Fees and Penalties

Missing loan payments will also result in late fees and penalty interest, digging a financial hole that can be difficult to get out of.

3. Your Debt Gets Sent To Collections

At a certain point, the lender will generally send your debt to collections, and then the collections agency will be the one reaching out to you to collect payment. If you don't pay, the collections agency could sue you for the money you owe, and if you refuse to pay it can get a court order to garnish your wages.

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

If you don't think you'll be able to keep up on loan payments, contact your lender as soon as possible. Explain your situation and ask what options are available. The lender might offer:

• Deferment or forbearance

• Modified payment plans

• Refinancing to lower monthly payments

You should also consider talking to a nonprofit credit counselor for free advice about how to manage your finances.

Timeline of a Personal Loan Default

Defaulting on a loan doesn't happen overnight; lenders generally follow this timeline when processing missed payments:

• 1-30 days late: Lenders offer a grace period for the first 30 days, though late fees may still apply.

• 31 to 60 days late: At this point, the lender will likely report the missed payment to the credit bureaus, and your credit score will start to take a hit. This will happen for each payment that's 30 days late or more.

• 90 days or more late: After 90 days, your payment transitions from being in delinquency to being in default, meaning that you're failing to repay the loan according to the terms outlined in the agreement you signed.

• Over 120 days late: At this point, the lender generally sells off your debt to a collection agency. The collection agency will take over attempts to collect the money you owe, and it may pursue legal action.

What Happens if Your Loan Has a Co-Signer?

If you applied for your loan with a co-signer, that co-signer becomes legally responsible for missed payments if you can no longer make them. If the co-signer doesn't make payments, their credit score will also be negatively impacted, and the lender can also pursue them for repayment.

Can You Settle a Personal Loan After Default?

If you can show serious financial hardship, you may be able to settle your personal loan debt after defaulting. That means you'll pay less than you owe, often as a lump sum.

Your best bet is to reach out to your lender as soon as possible to explore your options, though you still may be able to settle a personal loan once it's been sent to collections.

Your credit could still suffer even if you settle your debt, but it's better than dealing with legal action from a collections agency.

How To Avoid Defaulting on a Loan in The Future

Given the dramatic impact that defaulting on a loan can have on your credit, it's important to avoid getting into this situation at all costs. Here are some steps to take to avoid this negative event going forward:

1. Create a budget and prioritize high-interest debt: This will help you know exactly how much money you can afford to borrow and pay off each month, and prioritizing high-interest debt will save you money in the long term.

2. Look into debt consolidation loans or 0% balance transfer offers: Debt consolidation loans can help you streamline your debt into one manageable payment, and balance transfer credit cards offer a bit of breathing room, but you need to make sure you can pay off your balance by the time the introductory period ends.

3. Use a debt management plan through a nonprofit agency: Take advantage of free resources to get out of debt. Lenders and local programs may also offer hardship assistance.

4. Only borrow what you can realistically afford: This will help you avoid getting into debt or taking on more debt than you can manage.

5. Set up autopay or payment reminders: Sometimes missed payments happen on accident, but you can get ahead of them by automating your monthly payments.

6. Build an emergency fund to cover at least one monthly payment: Ideally, your emergency fund has at least three months of expenses, but even one month is a great place to start.

7. Read the loan terms carefully before signing:

   Make sure you know the terms, including if there's a grace period, as well as any late fees.

FAQs

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

You generally can't go to jail just for not paying a personal loan. However, if a debt collector sues you and you ignore court orders, you could be found in contempt of court. This could lead to you getting arrested if you continue not to comply.

How long does a default stay on my credit report?

A default can stay on your credit report for up to seven years.

Can I negotiate my loan after defaulting?

You could try to negotiate after defaulting on your loan. If the lender is willing, you could also try settling the debt.

What if my loan goes to collections?

If your loan goes to collections, the collection agency will take over pursuing you for repayment. If you don't pay, they can attempt legal action to recoup the money owed.

Is it possible to remove a default from my credit report?

Typically you can only remove a default from your credit report if it's listed in error. Otherwise, it'll remain on your report for about seven years after the date of default.

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