What happens if you default on your loan
If you miss loan repayments, you might receive a notice of default from your lender warning that you have broken your credit agreement. If you can't pay your debt, you risk a full default on your loan. If that happens, the loan default will remain on your credit report for six years.
When you can’t pay a loan
We use a lot of credit in the UK. According to the most recent statistics from The Money Charity, the average total debt per household ‒ including mortgages ‒ currently stands at a whopping £60,860.
What happens if you can’t make your loan repayments and you’re at risk of default? And what can you do to avoid getting into difficulties?
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What loan default means
When you take out a loan, you sign up to a credit agreement. This agreement details the exact terms of the loan, and the repayments you need to make.
But if you break the terms of that agreement ‒ for example by falling behind on your repayments ‒ and the lender doesn’t believe you are going to be able to resume making them on time, then it can cancel the credit agreement entirely.
This is when your loan is considered to have defaulted. The lender can then take certain action in order to recover the amount you owe. This could include taking you to court or passing the debt to a collection agency.
What is a default notice?
If you start to miss a few payments in a row, then the lender will usually send you a default notice. This is a letter reminding you that you will need to catch up with your payments or else run the risk of having the account closed entirely.
This is effectively a nudge from the lender to get you to make your payments, rather than miss them entirely and have a default registered against you. The charity StepChange suggests such notices will usually be sent if you have been behind with your repayments for between three and six months.
You will be given a deadline to make the missing payments in order to avoid a full default. This should be two weeks at the least, according to StepChange.
How will a loan default affect my credit score?
A loan default will remain on your credit report for six years. This is the case even if you then pay off that debt sooner.
As a result, any time that you apply for credit in the following six years, the lender will see that you have previously had a loan cancelled as a result of failing to make your repayments, which will count against your application.
However, this doesn’t mean that it will be impossible to secure some form of credit. There are some lenders who specifically offer products to borrowers with more patchy credit records. The interest rates charged on these products do tend to be higher than rates on products available to borrowers with stronger credit records.
As a result, if you have defaults in your credit history, not only will you have a more limited range of options open to you should you need to borrow in the future, it will also generally be more expensive, at least until the defaults disappear from your record after six years.
How to avoid defaults
If you are getting into difficulties meeting your repayments, then it’s really important to get some help. There is a host of debt charities operating in the UK that can help advise you on changes you can make to your own financial habits and how to go about discussing the situation with your lender. Importantly, they don’t charge for that advice either.
Charities that may be able to help you include:
- StepChange Debt Charity.
- Citizens Advice.
- National Debtline.
- Christians Against Poverty.
When you discuss your situation with the lender, there are various options they may suggest to help.
These could include lowering your repayments and extending your term, or even a payment holiday, meaning you don’t have to make any repayments for a month or two.
» MORE: How debt charities can help
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more