What happens if you don't pay back personal loan? (2024)

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.

FAQs

What happens if you don't pay back 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.

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What happens if you don't pay back a personal 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.

What happens if my personal loan goes to collections? ›

You could face legal action and have property seized if you default on a secured personal loan. Because payment history is a big factor in your credit score, a default could cause a major drop. You may be denied for future credit products like loans and credit cards or only eligible for a bad credit loan interest rate.

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What happens if you fall behind on a personal loan? ›

Personal loan default consequences

Missed payments not only damage your credit score; they also stay on your credit report for up to seven years and can make it harder to qualify for new credit or get a low interest rate.

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How long does a personal loan stay on your record? ›

In most cases, personal loans will stay on your credit report for around 10 years. But the type of inquiry can impact how long those marks actually remain on your credit report.

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Can a personal loan be forgiven? ›

Personal loans cannot be forgiven. In fact, it's rare for any types of debt (other than federal student loans) to be forgiven.

Can a personal loan be written off? ›

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.

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What happens if you don't pay back an unsecured loan? ›

If you don't pay an unsecured loan, you might face late fees and higher interest rates, and your credit score could drop. Debt collectors might call you and send letters. If you still don't pay, the debt could go to a law firm, and they might sue you.

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Is it a crime to borrow money and not pay it back? ›

It is legal to lend money, and when you do, the debt becomes the borrower's legal obligation to repay. For smaller loans, you can take legal action against your borrower if they do not pay by taking them to small claims court.

How long can you go without paying back a loan? ›

Your loan servicer will tell you how many months remain in your grace period and when repayment will begin. The length of a grace period is typically six months, but it can vary depending on the type of loan you received. The promissory note you signed for your loan tells you the length of your grace period.

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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.