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Getting a personal loan is a popular way to consolidate debt or cover unexpected expenses. But what happens if you can't afford the payments on your loan?
When you stop paying a personal loan, the consequences depend on the type of loan and how overdue your payments become. Failing to pay could result in your account going into default, the balance being sent to collections, your lender taking legal action against you and your credit score dropping significantly.
If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.
What Happens When You Stop Paying a Personal Loan?
What can you expect when you stop repaying a personal loan? That varies depending on your loan terms and when you missed your first payment. However, the following timeline will give you an idea of what usually happens at various stages.
0 to 30 Days
Lenders don't report missed personal loan payments to credit bureaus until one billing cycle (typically 30 days) has passed. If you can manage it, bringing the account current before that date can prevent the late payment from damaging your credit score.
Depending on your lender, however, you may face fees and penalties if your payment is just one day late. These can vary from as little as $25 to as much as 5% of the outstanding loan amount.
Learn more >> Does a One Day Late Payment Affect Your Credit Score?
30 to 60 Days
Once your payment is at least 30 days past due, your account is considered delinquent, and your lender may report the missed payment to credit bureaus. This negative mark will remain on your credit report for as long as seven years.
60 to 90 Days
The lender will continue to contact you requesting payment. If you don't pay, the missed payments will appear on your credit report in 30-day increments.
90 to 120 Days
After three to six months of missed payments (the exact time frame depends on your lender), your account transitions from delinquency to default status. Defaulting on a loan means you've failed to repay the loan according to the terms of your loan agreement.
120 Days or More
A lender will typically "charge off" your account after six months of missed payments (although some may do this sooner). A charge-off appears on your credit report and indicates that the lender has given up trying to collect the money from you. Instead, the lender generally sells the debt to a third-party collection agency. You're still responsible for the debt, but the collection agency, rather than the lender, takes over attempting to collect.
Once the debt is in the hands of a collection agency, it's considered a separate account. The charge-off remains on your credit report, but the collection account will show up on your credit report under Collections. The collection agency might sue you to get payment. Depending on the outcome of the lawsuit, the court might put a lien on your home or garnish your wages to repay what you owe.
Learn more >> What Happens if I Default on a Loan?
How Missing Loan Payments Impacts Your Credit
Missing personal loan payments has a significant negative impact on your credit. The longer you go without paying, the more those harmful effects can snowball. Here's an overview of potential consequences of missing payments.
Missing Payments
Because payment history is the most important factor in your FICO® Score☉ , accounting for 35% of your score, even one missed payment can damage your credit. If you have a long history of good credit, a single missed payment may not cause a huge decline in your credit score. If you have a thin credit file (few credit accounts on your credit report), however, your score could drop significantly.
The longer you continue to miss payments, the more damage is done. Each additional missed payment shows up on your credit history, often further lowering your credit score.
Learn more >> What to Do if You Miss a Payment
Defaulting on a Personal Loan
When your loan moves from delinquent to default status, it leaves a still more serious derogatory mark on your credit history. Even if you pay off the debt, your credit report will show the account's negative payment information for seven years after the initial date of delinquency.
Even if you've missed a payment or two, there are things you can do to prevent your personal loan from getting to this stage and minimize any impact on your credit score.
Defaulting on a secured loan has additional consequences beyond the credit impacts mentioned above. If your loan is secured by your car, bank account or another asset, the lender may be able to seize the asset backing the loan to cover the debt.
Learn more >> Can a Personal Loan Hurt My Credit Score?
Debt Charge-Off
As noted above, unless you bring the account current, your loan will eventually be charged off and may be sold to a collection agency. This creates a charge-off and potentially a new collection account on your credit history, each of which has a negative impact on your credit score.
Legal Action
If the collection agency successfully sues you, the court might garnish your wages. With less income to rely on, you might fall behind on other payments, further impacting your credit score.
Options if You Can't Pay Back Your Personal Loan
If you can't pay back your personal loan, what should you do? Struggling to afford your debts is a stressful situation. These next steps can help you avoid default.
1. Contact Your Lender
If you anticipate being unable to make payments due to financial hardship, contact your lender right away. Be honest and let them know you're having trouble making payments. They may be willing to work with you to adjust the terms of your loan or set up a new payment plan. You may be asked to provide documentation of your financial hardship, such as pay stubs showing a reduction in income or a bank account statement.
2. Look for Extra Money
Do whatever you can to make payments and avoid default. For instance, look for ways to squeeze more money out of your budget, think of ideas to make extra money or borrow money from a friend or family member if you know you'll be able to pay them back.
If you have emergency savings set aside, tapping into those funds to make personal loan payments can help you avoid going into default and damaging your credit.
3. Try Credit Counseling
A credit counselor from a reputable nonprofit agency can help you evaluate your financial situation to come up with a practical plan. For example, they can help you find solutions for how to manage your money and afford your debt payments. In some cases, a credit counselor may suggest a debt management plan (DMP), which puts you on a new payment plan. DMPs have some drawbacks, but they may be a source of relief and a way to save money while you pay off debt faster.
Learn more >> How to Find a Good Credit Counselor
4. Consider Debt Consolidation
Debt consolidation may be an option if you have good credit and the income to qualify for a new loan. When you consolidate your debt, you take out a personal loan—typically with a lower interest rate—and use it to pay off other debts. If you're struggling to repay your current loan because your monthly payment is too high or because you're juggling multiple debts, consolidation may provide some relief.
But keep in mind that debt consolidation has downsides, and can even lead you further into debt. Before you consider consolidation, check your credit report to see what you owe and how your debt is impacting your credit.
The Bottom Line
When you're having trouble paying back a personal loan, it can be difficult to find a way forward. It's important not to ignore the debt. Missing payments can seriously hurt your credit score, making it harder to get loans or credit in the future. Start by talking to your lender right away. In some cases, they may be able to extend help in the form of reduced payments or waived late fees.