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If you're struggling to afford your bills and think you might miss your next personal loan payment, you should compare your options before it's too late. Falling behind and eventually defaulting on the loan could lead to additional fees and hurt your credit for years. You may be able to get help or avoid the late payment if you act quickly.
When Is a Personal Loan in Default?
Your loan may technically be in default when you first miss a payment, as you're failing to follow through on the terms of the loan agreement you signed. However, many personal loans (and other consumer loans) have a grace period before a payment is reported to the credit bureaus as late.
Even after the grace period has passed, creditors may consider your loan delinquent for a period before declaring it in default. How long your loan is considered delinquent depends on the lender, but usually after three to six months, it will be considered in default.
How to Avoid Defaulting on a Personal Loan
There are a few ways you may be able to avoid missing your personal loan payment, but the best approach will depend on your situation.
For example, if you can't afford a bill this month because of a one-time setback, dipping into an emergency fund or temporarily relying on a credit card might make sense. But if you expect to have trouble for months to come, you may want to keep your emergency fund for essential expenses (such as housing and food) and consider other options or types of assistance.
With that in mind, here are a few options to consider.
Review Your Budget and Cut Back
If you can cut expenses, you may be able to free up money you can put toward your loan payments. Review your budget or recent bank and credit card statements to get a sense of how much you're spending and where your money is going. While cutting back is never fun, avoiding a late payment can save you money, and preserving your good credit can give you more financial options in the future.
Contact Your Lender
When there's no wiggle room in your budget or you're dealing with an emergency situation, such as a lost job or unexpected medical bills, reach out to your lender right away. The company may have hardship programs, such as a temporarily lower interest rate or monthly payment, or a temporary pause on your payments.
Refinance or Consolidate the Loan
If you have good credit, you may qualify for a new loan you can use to refinance or consolidate debts. Your monthly payments could decrease if your new loan has a lower interest rate or longer repayment term. While moving debt from one lender to another isn't a sustainable long-term strategy, it could give you enough breathing room to catch up on your bills and avoid defaulting on your loan.
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Use a Balance Transfer Credit Card
Similar to using a new loan, some credit cards offer a promotional 0% annual percentage rate (APR) on balance transfers. A few cards also let you transfer a balance to your checking account, and you can then use the money to pay down or off the personal loan. It may be easier to make the credit card payments and pay down the debt while the credit card isn't accruing interest.
Work With a Credit Counselor
Credit counseling agencies can review your finances and offer suggestions for how to best handle your debts. They may also be able to work with your lenders to get you on a more sustainable repayment plan or point you toward other organizations or resources for financial assistance.
What Are the Consequences of Not Repaying Your Loan?
Missing loan payments can have serious implications for your finances and credit:
- You may be charged a late payment fee
- Interest continues to accrue on the loan
- The late payments get reported to the credit bureaus
- Other negative marks, such as a collection account, can also hurt your credit
- You could be sued and forced to repay the debt, which could be much larger by this point
What Happens After You Miss a Loan Payment?
The exact process and timeline can depend on the lender, but here's an example of what could happen once you stop repaying your personal loan:
- Grace period: Lenders may give you a short grace period, such as 15 days, to bring your account current.
- Late payment fee: If you don't make your full payment before the grace period ends, you could be charged a late payment fee, which could be a flat fee or a percentage of your past-due amount.
- 30-day late payment reported to credit bureaus: Once your payment is at least 30 days late, the lender may report your account as 30 to 59 days late. The late payment will be added to your credit reports and can hurt your credit scores.
- Additional late payments reported: Your lender may continue to report your account as past due if you don't bring it current, and the further behind you fall, the more your credit score could drop.
- Collections: The lender may assign or sell your debt to a debt collector, which will start reaching out to you to try and collect the debt. A collection account may appear on your credit report, which could hurt your credit score.
- Potential settlement offers: The original lender or collection agency may offer to settle your debt for less than you owe. The debt will be cleared and the account will be closed after you settle. However, the creditor will report your account as settled on your credit report, which could be worse for your scores than an account that's closed and paid in full. You may also have to pay income taxes on the debt you didn't have to repay.
- Garnished paycheck or bank account: The lender or collection agency could sue you for the unpaid debt. If they win the lawsuit or get a default judgment if you don't appear in court, they may be able to take money directly out of your paycheck or bank account.
- Your debt reaches the statute of limitations: State laws dictate how long the lender or collection agency has to try and collect the debt. The statute of limitations often ranges from three to six years but is longer in some states. After the statute of limitations is reached, the lender or collection agency can't threaten to sue or sue you for the debt. The statute of limitations is different from how long negative marks can stay on your credit report, which is generally seven years from when you first missed your loan payment.
While you have a legal obligation to repay the debt you take on, consumer protection laws also protect your rights and limit what creditors and collection agencies can do. You can learn about your rights under the Fair Debt Collection Practices Act and contact a consumer rights attorney if you feel like you're being harassed or treated unfairly.
Don't Ignore the Debt
It might not feel like there's a lot you can do when your bank account runs low and you have to pick and choose which bills to pay. However, letting your loan go into default might not be your only option. Reach out to lenders and credit counselors who may be able to offer help or guidance, and check your credit report to see if you might be able to qualify for financing that can reduce your monthly payment while keeping you from defaulting on a loan.