Most people borrow money with every intention of paying it back. But life circ*mstances sometimes intervene and make that difficult or impossible. When a personal loan is involved, the consequences of failing to pay will vary according to the type of loan—secured vs. unsecured—and other factors. Here is what you need to know.
Key Takeaways
- Missed payments on a personal loan will be reflected in your credit reports and have a negative impact on your credit score.
- You may not see much effect until you're at least 30 days late and reported as delinquent.
- Letting your account move from delinquency into default (usually 90 to 120 days) can lead to collection calls, the potential for lawsuits, a lien on your home, or garnishment of your wages.
- Rather than let the situation get worse, it's best to reach out to your lender as early as possible to ask about hardship programs or refinancing or consolidating your debts.
What Happens When You Miss a Personal Loan Payment?
If you miss a personal loan payment, you can expect a number of things to happen based on how many days have passed since the payment was due. Here is a typical timeline.
30 Days Past Due
For the first 30 days after you miss a loan payment, you may not receive much correspondence from the lender or notice any impact to your credit score. That's because, generally speaking, lenders don't report late payments on accounts until at least one billing cycle has passed.
That said, you may see a late fee added to your loan balance. These fees can vary, depending on your lender and your loan contract. According to the credit bureau Experian, the fees often range from $25 to $50 or 3% to 5% of the payment amount.
30–60 Days Past Due
Once your late payment has been reported to the credit bureaus, your account is considered delinquent, and you'll likely see your credit score take a hit. According to the Consumer Financial Protection Bureau (CFPB), negative information reported to the credit bureaus, such as missed payments, can stay on your credit reports for seven years.
60–90 Days Past Due
Once your loan payment is 60 to 90 days past due, your lender will continue to send you statements and request payment. Your late payments will also continue being reported to the credit bureaus every 30 days on the date each payment is due.
90-120 Days Past Due
At some point from 90 to 120 days past due, your lender will stop reporting your account as delinquent and start reporting it as being in default. This information is added to your credit reports, which means that the damage you see to your credit score may get progressively worse.
After 120 Days Past Due
According to Equifax, lenders typically "charge off" accounts in default after a payment has not been made for at least 120 days. Ultimately, this means that the lender has given up on the prospect of collecting payment from you, and that it plans to sell your debt to a third-party company, usually a collection agency.
Once your account is "in collections," that agency will attempt to collect payment from you and potentially sue you for whatever you owe. The agency may also try to put a lien on any assets you have to help satisfy the debt, or it may attempt to garnish your wages through the court system.
Your late payments will now show up twice on your credit reports—once with the original lender and another time with the collection agency. This information may also stay on your credit reports for seven years, causing significant damage to your credit score the entire time unless it's resolved.
Defaulting on a Secured Loan
If your personal loan was secured with collateral, you can expect your lender to try to repossess that collateral after you miss a few payments. Note that, with some types of repossession, your lender is not required to notify you or get an order from the court system ahead of time. This scenario is more common with auto loans than secured personal loans. However, it can also happen when you use a car title as collateral for a personal loan.
Some secured personal loans use cash in a connected savings account or certificate of deposit (CD) as collateral. In the case of failure to repay, the bank could keep that money to satisfy the loan.
In either scenario, losing your collateral due to nonpayment does not mean you're safe from damage to your credit score. Your late payments and delinquency will continue to be reflected on your credit reports.
Defaulting on an Unsecured Loan
If your personal loan is unsecured, which is often the case, the lender doesn't have any collateral to seize if you fail to repay.
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. And, as with a secured loan, you can expect a serious impact on your credit score.
How Does Defaulting on a Personal Loan Affect Your Credit?
How you handle your personal loan can have a dramatic impact on your credit score, since your payment history is the most important factor in both FICO credit scores and those that use the VantageScore scoring model.
Late payments and accounts in default stay on your credit reports for seven years, meaning you may face financial consequences for years to come. Not only will your credit score be hurt, but lenders who see this information on your credit reports are much less likely to approve you for a new loan in the future.
How Can You Avoid Defaulting on a Personal Loan?
Consider the following actions if you're on the verge of missing a loan payment:
- Contact your lender right away. Your lender may have options that could help you, such as a hardship program. Your lender might also let you change your due date to give you a little more time.
- Look for areas of your budget that you can cut. Try to pare back on spending in discretionary categories like dining or entertainment to free up cash for your loan payment. This may not be a long-term solution, but it might buy you some time.
- Look into loan refinancing or debt consolidation. See if refinancing your personal loan makes sense or if debt consolidation could help you get a lower interest rate, a lower monthly payment, or both.
- Reach out to a credit counseling agency. A nonprofit credit counseling agency can often help you get lower interest rates and a more manageable monthly payment, as well as stop or prevent collection calls. But beware of scams that promise to make your debts disappear as if by magic.
Can You Lose Your House with a Personal Loan?
If you have a secured personal loan with your house acting as collateral and you fall behind on your payments, your lender could foreclose on it to repay your debt. Even if your loan is unsecured, should it end up in default, there's always the possibility that a lien will be placed on your home until the debt is repaid.
The Bottom Line
Failing to repay a personal loan can cause considerable damage to your credit history and credit scores that lasts for years. Not only will that make it harder to obtain credit in the future, but possibly result in higher insurance premiums and, in some cases, greater difficulty in landing a job or renting an apartment.
For all of those reasons, it's best to stay on top of your loan payments if at all possible, and to seek help at the first sign of trouble.
