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You had every intention of repaying your personal loan. But then life happened — maybe an unexpected job loss, injury or divorce — and now you’ve missed a payment and you’re facing default.
When you miss a personal loan payment, the loan is considered delinquent. If you miss several payments, your lender will eventually consider the loan in default. Your credit score may take a significant hit, and your lender could send the loan to collections.
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?
Typically, a personal loan is in default when a payment is late by 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 about 15 days. The fee can be charged as a dollar amount (around $10 to $40) or a percentage of the payment due (typically 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 three major credit bureaus (Equifax, Experian and TransUnion).
Personal loan default timeline
| Payment timing | Potential consequences |
|---|---|
| Immediately after you miss a payment. | Your loan is considered delinquent and you might owe late fees, but your missed payment probably won’t be reported to the credit bureaus yet. |
| After 30 days. | Your lender may report your loan as delinquent to the credit bureaus. |
| After 90 days. | Your lender will likely change your loan status from delinquent to default. |
| After 120 to 180 days. | Your lender may “charge off” your loan, which means it no longer keeps it on its books, and transfer the account to a debt collector. A new collections account may appear on your credit report, which negatively affects your credit score. |
Personal loan default consequences
Defaulting on a personal loan carries several potential consequences, including:
Damage to your credit. Late payments reported to the credit bureaus can knock as much as 100 points off of your FICO credit score if you have good to excellent credit (a score in the mid-600s or higher).
Missed payments 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 or get a low interest rate.
Phone calls and other communications from debt collectors. Once your loan is officially in default, 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 to recover the debt.
Legal action from your lender. 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.
Seizing of collateral. 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.
Negative impacts for your co-signer or co-borrower. Finally, if you have a co-applicant on your loan, whether a co-signer or co-borrower, that person is on the hook to repay the loan if you default.
Lender programs to help you avoid default
Some lenders offer programs to help borrowers facing financial hardship avoid defaulting. Not all lenders advertise the details of these programs, though. Contact your lender to find out what options are available.
| Lender | Hardship options |
|---|---|
| Loan extensions, short-term and long-term reduced payment plans. | |
| Short-term reduced payments, interest-only payments or extended loan terms if you’re experiencing temporary hardship. APR reduction and term extensions if you’re facing permanent hardship. | |
| Payment reduction, extended loan terms. | |
| Payment deferral for up to 90 days if you can document financial hardship, options to split up payments over time or change payment schedule. | |
| Forbearance if you’ve been laid off and you have a loan in good standing that you’ve had for at least nine months. |
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.
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. Collectors can’t have you jailed or threaten to have you arrested over an unpaid debt. 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. Credit counselors can discuss the pros and cons of filing for bankruptcy if you can’t realistically repay your debt.
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