At a Glance

Taking on a loan is a serious financial responsibility that requires you to stay on top of repayments. By understanding what happens if you default on a signature loan, you can learn the long-term consequences that come with not following through on this financial obligation.

In this article, you’ll learn:

What is a signature loan?

A signature loan is a special subset of unsecured personal loans. Being unsecured means that there is no form of collateral required to be put down by the borrower. What makes signature loans so unique, however, is that they can be taken out simply by providing a lender with your income, credit history, and signature.

Due to the fact that a signature loan requires such little information and is unsecured, being approved for this type of loan will usually require a good credit history and an income level that clearly shows you can afford the loan. Signature loan borrowing amounts also tend to be smaller than other personal loan types due to this higher risk on the lender’s behalf.

Learn more: Signature Loans

When is a loan considered to be in default?

In an ideal world, a borrower would never default on their loan. However, defaulting on a loan can certainly happen and understanding the threshold for entering default is important as a borrower. In most cases, a loan enters default when a payment is late by 30 to 90 days. At this point, it can be reported as a late payment to the credit bureaus which can have an extremely negative impact on your credit score.

Specific terms for a loan entering default may vary from lender to lender so be sure to read your contract to determine the amount of time.

What happens when you default on a signature loan?

When looking at what happens if you don’t pay back an unsecured loan, it’s important to know that there are a few different things that will happen. Missing your payment for up to 30 days will only result in your loan entering delinquency. While you may owe a late fee, the missed payment won’t yet be reported to the credit bureaus.

Once you have missed your payment for over 30 days, the lender will contact you, assuming they haven’t already, to inquire as to when you will make the payment. This is when the credit bureaus will be alerted, and your credit score will suffer. Should you continue to not pay for another 30 days, your credit score will continue to decline, and your lender will also continue trying to contact you. Loans that have not been paid over 90 days will typically result in the lender taking legal action against you to settle the debt.

Signature loans are unsecure, so there is no form of collateral that the lender will attempt to repossess. However, they may be within their rights to sue you in a court of law in order to get the money they are owed.

Related: Default on a personal loan

Delinquency vs Default

There is a key distinction between a loan entering delinquency and default. A loan that has entered delinquency is under 30 days late, in most cases. A lender will likely reach out and inquire as to why the payment is late and there may be a late fee associated with this situation. Most lenders will not report delinquent loans to the credit bureaus.

After 30 days of missed payments, typically, a loan is said to enter default. The credit bureaus are informed, your credit score is heavily impacted, and the entire loan amount may be demanded at that time.

Next steps to take when faced with loan default

There are many reasons your loan may have entered default, so figuring out your next steps should be a top priority if you are in this situation.

1. Contact your lender

If you know you are going to be unable to meet a payment, it’s better to be proactive and contact your lender in advance. Explain your situation and why you may be defaulting on a signature loan. Legal action against personal loan defaulters can be expensive, so many lenders may offer temporary deferments on payments or allow you to set up some type of more lenient payment plan.

2. Understand your rights

When debt collectors come to get the money back on behalf of the lender, be aware that they are not allowed to use abusive, unfair, or deceptive practices. You have rights under the Fair Debt Collection Practices Act that ensure this, so contact an attorney if you have been mistreated.

3. Contact a lawyer

Assuming you have been served with a lawsuit or know you will be unable to pay your loan, investigate hiring a lawyer. If you do not show up in court, the judge can still resolve the case and automatically rule in favor of the lender.

4. Reach out to a counselling agency

Debt counseling can help you to build a budget that allows you to prioritize payments on your loan. Even if you are not in default on your loan, a credit counseling agency can be extremely beneficial in helping you plan your finances.

5. How can you avoid defaulting on your signature loan?

The best way of saving money is to avoid your loan entering default. There are a few key strategies you can use to stay on top of your payments:

6. Work on your budgeting and payment plan

The first step in avoiding defaulting on a signature loan is to focus on building a budget that allocates money which can go towards your payment. Set aside a certain amount of money, dependent on your loan repayment amount, every month before using funds for discretionary expenses. This can help you build a payment plan for your loan.

Related: Personal Loan Calculator

7. Have a debt management plan in place

An important part of taking on any form of debt is creating a debt management plan. This plan can include outlining how you will meet your payments, the terms of your loan, emergency fund allocation amounts, and more. When taking on debt, it’s best to be prepared for anything by having a comprehensive plan.

Related: Debt Management Plan Pros and Cons

8. Consider debt consolidation

If you already have a large amount of debt outstanding with multiple interest rates, debt consolidation can be a smart strategy for getting all your payments under one single rate. Debt consolidation credit card and loans exist, where a lender essentially loans you enough money to pay off all your debt, which you then repay to the sole lender under one interest rate. Balance transfer credit cards work in a similar manner.

Related: What is Debt Consolidation & How to Do It ?

9. Borrow against your 401(k)

401(k) loans allow a borrower to take money out against the value of their 401(k) as collateral. 401(k) loans are dangerous, though, as defaulting on this type of loan can result in your 401(k) portfolio being depleted.

Related: 401k Loan To Pay Off Debt


The terms of a signature loan can vary from lender to lender depending on the amount you borrow. Most signature loans have terms ranging from two years to five years. In general, you will be required to make payments on your loan every 30 days.

Yes, a signature loan will affect your credit positively or negatively, depending on whether you meet your required repayments on time. Always make payments on time or resolve a delinquent loan before it enters default to ensure your credit score stays healthy.

When looking at what happens if you don’t pay a loan back, it’s important to understand that there are serious consequences. The answer to what happens with defaulted signature loans is that a lender may take a borrower to court over the matter if it remains unpaid. In this situation, a court may rule that you pay back the borrower which, on top of legal costs, will only be more money out of your pocket.

No, loan default is a civil offense and not criminal. No one can force you into jail for failing to meet your payments, but a court may certainly rule that you owe the lender their money in a timely manner. What happens if you don’t pay back a loan is that the court will potentially rule against you, and if you don’t follow the court order of repayment you might then be arrested.