You had every intention of repaying your personal loan when you signed the loan agreement. But then life happened — maybe an unexpected job loss, injury or divorce — and now you’ve missed a payment and you’re facing default.
Defaulting on a personal loan means your monthly payment is at least 30 days overdue. As a result, your loan may be heading to collections, and your credit score is likely taking a hit.
It's time to take action: Contact the lender and explain your situation. Some lenders will offer short-term relief, especially to borrowers impacted by the COVID-19 crisis. You may be able to mitigate serious damage by being proactive.
Here’s what to expect if you default on a personal loan, and steps to take now if you face default.
When is a personal loan in default?
A personal loan in default means a payment is late by 30 to 90 days. The exact timing depends on the type of loan, the lender and the terms of your loan agreement.
Personal loans are delinquent, but not in default, if a payment is just a few days late. You may be charged a late fee after a grace period of 10 to 15 days. The fee can be charged as a dollar amount ($15 to $40) or a percentage of the payment due (5% to 10%).
The payment must be at least 30 days past due for the lender to report it as a late payment to the credit bureaus. Late payments can knock as much as 100 points off of your FICO credit score if you have good to excellent credit (690 to 850).
Defaults 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.
Personal loan default consequences
Once your loan defaults, the lender either moves the unpaid loan balance to an in-house collections department or sells it to a third-party debt collector. You may receive phone calls, letters, e-mails or text messages from the collection company in an attempt to recover the debt.
If your loan is unsecured, the lender or debt collector can take you to court to seek repayment through wage garnishment, or place a lien on an asset you own such as your house, says Russ Ford, a financial planner and founder of Wayfinder Financial.
“Just because [lenders] don’t have property to seize doesn’t mean [defaulting is] consequence-free and they can’t get you to pay it back,” Ford says.
If the loan is secured by an asset such as your car, savings or investment accounts, the lender has the right to seize the asset to recover its losses, as stated in the loan agreement.
For example, if the loan was secured by a car title, the lender may send a letter demanding payment. It can repossess the vehicle if not repaid within the specified time frame, Ford says.
Finally, if you have a co-applicant on your loan, whether a co-signer or co-borrower, that person is on the hook to pay up if you default.
What to do if you face loan default
Contact the lender: Be proactive and call the lender before your next payment is due. The lender may be able to provide some relief — such as temporary suspension or deferment of loan payments — if you explain your situation.
“It’s always better for you to bite the bullet and deal with it, and go to the loan provider for help before it goes to collections or default,” Ford says.
Know your rights: Understand your rights under the Fair Debt Collection Practices Act (FDCPA) if you face default or if your debt has already entered collections.
It’s illegal for debt collectors to use abusive, unfair or deceptive practices when attempting to collect on debts. If a debt collector is harassing you or breaking the law, you can file a complaint with the Consumer Financial Protection Bureau and contact your state’s attorney general.
Contact a lawyer: If you’ve already been served with a lawsuit, seeking legal help is likely your best course of action.
You’ll need to appear in court to avoid a default judgment in which a judge resolves the case and automatically rules in favor of the lender or debt collector.
Speak with a credit counselor: A credit counseling agency can work with you on your budget or create a new budgeting plan, which can free up cash to pay down what you owe and help you stay current on all of your debts.