What Happens if I Default on a Personal Loan?
Trevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.Read full bio
At a Glance
While one should aim to never default on a personal loan, it does happen. Knowing the answer to what happens if you default on a personal loan, what your next steps should be, and how to rectify the situation should immediately be at the top of your mind.
In this article, you’ll learn:
What does it mean to default on a personal loan?
Defaulting on a personal loan means that the borrower who is responsible for the loan has fallen behind on their payments. A personal loan defaulter may not be pursued by the lender for the first couple of missed payments due to high costs associated with debt collection but make no mistake that they are aware of the default on personal loan obligations.
If you are not able to repay what was missed and the default continues, it’s very likely they will enforce the default provision of your loan’s contract.
When is a personal loan in default?
Missed payments are only reported as being in delinquency if they occur more than 30-90 days after the due date. It’s worth reiterating that missing a payment by a few days will not send your loan into default, but rather delinquency.
Late payments may come with an associated fee, but they will not be reported to the credit bureau until they are 30 days past due.
How loan default works?
Personal loans with unpaid default payments mean payments that are at least over 30 days late. Any late payments on a loan that are not over 30-days late are considered delinquent and may come with fees, but typically not damage to your credit score. Assuming a personal loan with paid default payments has not occurred and 30-90 days have passed, the loan will enter default.
At that point, it is up to the lender to determine what happens next. They will begin making moves to recoup their money by contacting you directly or through a third-party. For assets secured by collateral, such as a car loan, the lender will likely attempt to repossess the collateral. A mortgage loan default will likely result in your house being seized by the lender.
Consequences of defaulting on a personal loan
The consequences of a personal loan default can be drastic and long-lasting. Beyond simply heavily impacting your credit score, defaulting on a personal loan consequence can include:
- Legal action against personal loan defaulters: Lenders may go after you in a court of law if they are not able to track you down to receive the money they are owed. Additionally, if they are unable to receive the full value of the loan by selling or repurposing a seized asset, they may take you to court to get the remaining amount.
- The seizure of assets: Secured loans backed by collateral will result in the asset being secured by the lender. As mentioned above, they may still come after you if they are not able to recoup the full value of the loan from the collateral.
- Credit score and history damage: Beyond just legal trouble and the potential seizure of your assets, defaulting on a loan can heavily impact your credit score. Payments in default can drop your credit score by as much as 100 points for those with stronger credit and can take up to seven years before it is removed from your credit history.
The average default rate of personal loans was only around 3.25% at the start of 2022, which means most people are avoiding the above consequences. For both financial and personal reasons, it’s best to avoid ever letting a loan enter default.
How can you avoid defaulting on a loan?
The best way to avoid defaulting on a loan is to make a repayment plan when taking out the loan. Every month start by setting aside enough money to repay that month’s portion of the loan before using any income for discretionary purposes. This will help to ensure that you always make payments on time and in-full when t when they are due. Just be sure not to dip into the set-aside sum of money during the remainder of the month once you meet your goal.
Assuming your loan is already in delinquency, pay back the amount you owe as quickly as possible to ensure the loan does not enter default.
How to get out of default?
There are a few strategies that can help if you are about to default or are already in default. Contact your lender as soon as possible to get in front of the issue, as they may be able to provide temporary suspension or deferment of payment in special circumstances. Understand what will happen when debt collectors contact you, as well as brush up on what practices they are allowed to use and those they aren’t allowed to use.
You should also contact a lawyer and speak with a credit counselor as soon as possible to see if settling the debt is possible.
The penalties for defaulting on a loan can include the seizure of assets, legal action, and long-standing negative impacts on your credit score and history. Remember that late payments under 30-days can be repaid with a fee, but they likely won’t affect your credit score. Don’t let a loan go into default by allowing late payments to continue beyond 30 days.
You can try negotiating with your lender to see if they will offer any suspensions of payments or deferments but paying back the sum of money you owe is the quickest way to get out of default. Be aware that a lender will likely seize whatever the loan is secured by if you do not.
Some of the major consequences you will likely see when defaulting on an unsecured loan are difficulty securing any form of credit in the future, legal repercussions, wage garnishment, and more.
When defaulting on a loan, a lender may come after you legally to receive what they are owed. This can come in the form of direct payments back to the lender, money being pulled from your wages, and more. Additionally, the lender may repossess or take whatever item was being used to secure the loan.