John Ellmore
Taking on a loan can be a stressful experience when you realise you’re unable to pay it back. Ideally you need to make sure you can make the repayments before taking out a loan, but sometimes unforeseen financial circumstances do arise that make this difficult or impossible.
This is not an uncommon situation, either: 8.3 million people in the UK are in debt, whilst 24% of the population are losing sleep worrying about their repayments.
Today we examine what happens when you can’t make your loan repayments, as well as how to look after your finances so that you hopefully never end up in that position.
What happens if I can’t make a loan repayment?
If you miss a repayment on your loan, you may be charged a late repayment fee. You should also factor in that you could have additional interest charged on the missed amount. These increased costs will continue if you miss further repayments.
Missing a loan repayment will put you in arrears, meaning you will owe more interest than you did previously. The less you pay back, the more your debt will accumulate.
Exactly what happens next will depend on the type of loan you have taken out and the terms of your borrowing.
Secured loans
If you have taken out a secured loan (a loan against which you have pledged an asset as collateral), you will put your home or asset at risk if you continue to fail to meet your repayments as the lender could start steps to call in the full amount of the loan.
» MORE: What to do if you’re struggling with secured debt
Unsecured loans
If your loan is an unsecured loan (also called a personal loan) the lender will be keen for you to look at ways to meet the repayments. You could face charges and fees which will increase the overall cost of the debt.
Prolonged missed repayments could mean that the loan is classed as fully defaulted. The lender could pursue the return of the outstanding loan and costs via the courts.
Guarantor and Joint Loans
If you have taken out a guarantor loan then if you miss a repayment, the lender will look to your guarantor to pay the missed amount. You will harm your guarantors credit profile if you miss repayments.
If you have taken out a loan in joint names, you are both equally liable for the repayments. You cannot individually pay half and assume you have met your responsibilities. You are both equally responsible for full monthly repayments, and equally liable for any failure to meet the terms of the loan.
What happens if I default on my loan?
Defaulting on a loan is when you miss multiple successive repayments, and the lender seeks to end the loan agreement and requires the return of the full outstanding loan plus any other fees and interest. This will have a serious impact on your credit score and may end up with the lender initiating court proceedings.
IVA (Individual Voluntary Agreement)
If you have multiple debts that you can no longer meet the repayments of, you may wish to look into Individual Voluntary Agreement (IVA). An IVA is a legally binding agreement between you and all of your creditors, to pay back all or part of the debt over a period of time.
IVA’s must be set up by the insolvency practitioner. You can also seek help with IVA’s from debt management company’s but be warned, these firms can charge fees on top of the insolvency practitioner fee.
The practitioner will work out how much you can afford to pay either monthly or in a lump sum. They will distribute the money to your creditors over usually 5-6 years. If the repayments are not enough to clear the debt at the end of the term, you will not be required to clear the outstanding debt.
IVA’s will make a serious dent to your credit score, and you will not find it easy to secure credit for the duration, and access may be limited for a period after the end of the agreement.
CCJ (County Court Judgement)
If you repeatedly miss repayments and the loan is considered defaulted, the lender will seek for you to repay the loan in full and end the agreement. If you fail to do so, they may decide to try to pursue the funds via court.
If a court formally decides you owe the money you will be issued a County Court Judgement (CCJ). Unless you clear the entire sum within 30 days the CCJ will be formally lodged and will remain for 6 years. During this period you would find it very hard to obtain other forms of credit.
Note that CCJs apply only in England, Wales and Northern Ireland. In Scotland, the court instead leverages a process known as enforcing a debt by diligence.
Bankruptcy
Bankruptcy should only be considered if there are no other ways in which you can deal with your debts. You should seek advice from debt services and charities to fully understand the process and impact before you proceed.
To become bankrupt, you will need to apply online via the government website, and there is a cost involved. An adjudicator will decide whether or not you can be declared bankrupt. The process may include an interview and your assets may have to be used to clear your debts. Whilst you are formally bankrupt, you will have to follow restrictions. Usually you are discharged from bankruptcy after 12 months.
Bankruptcy can take 7-10 years to not show on your credit report.
How could missing a loan repayment affect my credit score?
Missing a repayment on your loan can have a serious impact on your credit score. Your provider will be obligated to report any late or missed repayments to the credit reference agencies.
Your credit file lays out your history of repayments on any borrowing, demonstrating to prospective lenders how reliable, trustworthy and financially stable you have been. If your provider informs your credit reference agency that you have missed a repayment or defaulted on your loan, your credit score will suffer.
What can I do if I’m going to miss a payment?
Contact your lender as soon as you think you’re going to miss or be late on a loan repayment. If you believe this will be only a short-term issue then they may grant you extra time. Alternatively, they may delay reporting you to the relevant credit reference agency.
But don’t become complacent, as such leniencies are unlikely to repeat themselves if you continue to not meet repayments. If you think your repayment struggle is a more long-term issue, there’s no harm in contacting your lender for an open and frank discussion.
One main reason to contact your lender before you miss repayments is once you have damaged your credit profile, you will limit their and your ability to find alternative ways to manage the debt.
You may also consider asking for some breathing space whilst you seek independent help to work out how to manage your debts. If you’re unsure how to approach the conversation, you can begin with National Debtline’s template letters.
It’s also important to prioritise your debts. Those that generally take precedence are for your utilities and your mortgage. If you fail to pay these, you could face your heating being turned off or losing your home entirely.
How can I avoid missing a loan repayment?
If you’re struggling with your debt, work out your debt hierarchy. Calculate which is most expensive and pay that one off first, as it will accumulate more quickly and become exponentially more difficult to control. Then work your way down your debts.
Budgeting
This is the most surefire way to avoid large sums of debt piling up. List all of your essential expenses and how much they are costing you.
From there, work out how much you can feasibly put aside every month to pay off your debts. Plan ahead in this way and you’ll feel calmer and more prepared when your repayments are due.
Restructuring
Your creditor may permit you to restructure your loan so that the term is longer and the monthly repayments lower. You will end up paying more interest overall, however if the adjustment makes repayments affordable, this is likely to be a sensible option.
Payment holiday
Some providers offer repayment holidays, which enable you to miss the occasional monthly repayment when arranged in advance. Check with your lender if this will have a negative impact on your credit score.
However, your lender will have to increase the sums of your future monthly repayments to compensate for your holiday period.
Debt consolidation
Debt consolidation involves combining all your debts into a single loan and repayment, the idea being the one repayment is more affordable. Depending on the size of the combined debt you could use either a secured or unsecured consolidation loan. You would usually only consider a secured consolidation loan for higher loan amounts. The rate will entirely depend on the size and type of loan you choose.
Remember that by extending the term of your debt you will increase the total amount you will repay and you will need a good credit score in most cases of unsecured consolidation loans.
Read our debt consolidation guide to find out more.
Who can advise me?
Help and advice are out there if you’re struggling with your debts. The following are all reputable debt advice charities and organisations:
If you are going to miss a debt repayment or are struggling to keep on top of your debts, keep calm and communicate with your provider.
Trying to hide the fact that you’re going to miss a repayment will only make the situation worse. Don’t be afraid to ask for help and advice. It’s better to address the problem now than let it fester.
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