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
Going to court and having your wages garnished.
In certain situations, if a debt collector (or the original lender) is unable to get you to pay at least a portion of what you owe, there's a very good chance that they may seek a legal remedy. They may take you to court and seek a garnishment on your wages.
What happens if I stop paying on a personal loan? ›
Late payments and accounts in default can stay on your credit reports for seven years, meaning you may face financial consequences for years to come. 3 Not only will your credit score be hurt, but lenders that see this information on your credit reports are much less likely to approve you for a new loan in the future.
What happens if a personal loan is not paid? ›
Lenders can file a case in a civil court seeking repayment. Defaulters may face asset seizure or wage garnishment. Negotiation and settlement options may be explored before legal recourse. This will also reflect on your credit history and severely affect your ability to secure loans in the future.
What if I can't afford to pay my personal loan? ›
As soon as you think you may have trouble making payments, reach out to your lender, as many will offer hardship programs or be willing to work with borrowers who are experiencing temporary financial difficulties. The potential outcomes from contacting your lender could include: Temporary payment deferment.
What happens if I never pay my loans? ›
Missing payments can rack up penalties and fees, which can make your debt more expensive. Your credit score will take a hit. If you default on federal student loans, the government could garnish your wages, tax refund and even Social Security benefits.
Can a personal loan sue you? ›
Defaulting on an unsecured loan
As a result, your credit score will absorb the majority of the impact from any missed payments. Then, once your account goes to collections, the collections agency has the right to sue you for the money you owe.
Is it a crime to borrow money and not pay it back? ›
While debt collectors can no longer have you jailed or threaten to have you arrested for not paying your debts, there are a few instances in which you can be incarcerated with debt as the underlying cause. For example, a debt collector can sue you and, if you fail to comply with court orders, you could get jail time.
Is it a crime to default on a loan? ›
Payment history accounts for 35% of your FICO score. Importantly, it is not a crime to default on a loan. No lender can have you arrested for failing to pay a loan. Defaulting on a loan may be a civil offense, and you might have to appear in court.
What happens if you ignore loan payments? ›
A loan goes into default after a borrower fails to make a payment for at least 270 days, or about nine months, which can result in further financial consequences. A default can further damage your credit score, making it harder to buy a car or house. It could take years to establish good credit again.
What happens if you take out a loan and don't pay it back? ›
When you don't pay back a personal loan, you could face negative effects including: Fees and penalties, defaulting on your loan, your account going to collections, lawsuits against you and a severe drop in your credit score.
If you're unable to make your private student loan payments, the lender can report your default to consumer reporting agencies, which could harm your credit. They may take different actions to collect the debt.
What to do if someone doesn't pay you back a loan? ›
Unless the matter also involves violence or an immediate threat there is really not much that the police can do for you if someone owes you money on a loan. More likely, the police will direct you to sue them in court, and depending on the amount you are owed you can file the lawsuit in small claims court.
Is it a crime to not pay back a personal loan? ›
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.
Can I just stop paying a personal loan? ›
Typically, after 120 to 180 days, the lender can charge off your account and sell your debt to a collection agency. Lenders may also be able to put a lien on the sale of your home or garnish your wages directly from your paycheck to recoup their payments.
How do I get out of a bad personal loan? ›
Consult with a professional credit counselor about your options for your situation or find a debt relief company to negotiate with lenders for a reduced amount of debt.
- How To Get Out of Debt.
- Understand Your Debt.
- Plan a Repayment Strategy.
- Understand Your Credit History.
- Make Adjustments to Debt.
- Increase Payments.
Payment history accounts for 35% of your FICO score. Importantly, it is not a crime to default on a loan. No lender can have you arrested for failing to pay a loan. Defaulting on a loan may be a civil offense, and you might have to appear in court.
