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No one takes out a personal loan intending to default and be harassed by creditors. But sometimes, life happens, and you fall further behind than you ever anticipated. From job losses or medical emergencies to vicious debt cycles, there are myriad reasons you may find yourself in this position. And if you’re there (or about to be), you should know what to expect.
What Does It Mean to Default on a Personal Loan?
The exact moment you’re considered “in default” may depend on your personal loan lender, the loan, and your agreement. But generally, you default on your loan when you fail to repay your debt according to your loan contract.
However, most lenders offer a grace period before reporting your account as past due to the credit bureaus. Even after that, they’re likely to wait a few weeks and reach out to collect payment or make alternative arrangements.
But eventually, your lender will enforce your contract’s default provision – and then you’ll have to deal with the consequences.
What Happens If You Default on a Personal Loan?
The further you fall behind on your payments, the worse the long-term damage will be. For instance, if you only miss a payment or two or reach out to your lender to alter your loan, you can often get back on track without too much hassle. But if you miss payments for 3-6 months and don’t contact the lender, you’re just digging yourself into a hole.
While each lender’s practices may vary, a general default timeline may look like this:
- 1-15 days late: Lenders often offer this time as a “grace period.” While your payment is delinquent, you’re not yet in default. Most lenders assess a late fee around the 10- to 15-day mark.
- 30-90 days late: During this period, your lender will try to contact you to collect payment and assess your situation. And around the 30- and 60-day marks, your lender will likely report your late payment to the credit bureaus. They may charge additional late fees and consider your loan in default if you don’t make payments.
- 90+ days late: The three-month mark is generally when lenders attempt to settle the debt or begin litigation. At this point, you’re considered in default. The lender may send your unpaid loan to their in-house collection department or sell your debt to a third-party collector.
However, late fees and phone calls from debt collectors aren’t the only consequences of defaulting on your personal loan.
Defaulting on Your Personal Loan Consequences
Credit Score Impacts
Your lender will typically report late payments to the credit bureau around the 30-, 60-, and 90-day marks. And unfortunately, one late payment can slash your score by as much as 130 points if you start with excellent credit.
Defaulting on your personal loan can further lower your credit score. Additionally, the default may remain on your credit report for up to 7 years, making it harder to qualify for credit later.
Lender May Claim Your Collateral
If you default on a secured loan, the lender may repossess or seize your collateral to cover your debt. Examples of collateral may include your home, car, jewelry, heirlooms, or even savings accounts.
Garnished Wages or Asset Liens
Just because you don’t sign over collateral doesn’t mean you can’t lose property if you default.
If your loan is unsecured, the lender or debt collector may drag you to court to seek repayment by garnishing your wages. In such instances, a portion of your paycheck will automatically go to your lender before you receive your money.
The court may also allow the lender to place a lien on your assets. Liens make it difficult or impossible to sell your property or use it as collateral on another loan. In some cases, debt collectors can even force the sale of your property to repay your debt.
Putting Your Cosigner in Jeopardy
If you have a co-signer or co-borrower on your loan, your default may jeopardize their finances or credit. Depending on your contract, your cosigner may be required to pony up the cash if you default. But even if they’re not liable to make payments, your cosigner’s credit will take a hit if you fall behind.
Harassed by Debt Collectors
Once you’re in default, the lender has a right to attempt to recover their money. However, the government has laws in place that dictate how they’re allowed to do that. Under the Fair Debt Collection Practices Act (FDCPA), lenders aren’t allowed to harass you with threats of violence, obscene language, or shady tactics.
Despite these laws, many unscrupulous collectors may favor getting their money over your right to feel safe. Collectors have been known to make harassing or threatening phone calls, contact workplaces, and even send agents to people’s homes. (While the last one isn’t technically illegal, it can still be intimidating.)
If you find yourself in this situation, it’s crucial to understand your rights under the law. You can also file a complaint with the Consumer Financial Protection Bureau and contact your state’s attorney general to report the harassment.
What Should You Do If You Face Loan Default?
If you haven’t gone into default yet but are at risk of falling behind, the best thing to do is reach out to your lender directly. Most lenders prefer to get their money than ruin your credit (and chances of making a profit off you). If you explain your circumstances, your lender may defer your payments, alter your loan, or propose another arrangement.
However, altering your loan agreement to relieve your burden isn’t always possible, whether due to your circumstances or lender inaction. In those cases, you may want to:
- Ask friends or family for financial support to tide you over
- Inquire about financial hardship programs through your employer or state
- Seek out free or low-cost credit counseling through a nonprofit
- Go onto a debt management plan to minimize the damage
- Consider a debt consolidation loan to potentially save on interest
How to Get Out of Personal Loan Default
If you can’t (or haven’t) head off personal loan default at the pass, you’re not out of options yet.
You can start by contacting your lender to request temporary relief or debt forgiveness. However, many lenders are reticent to work with borrowers who haven’t been proactive. In other words, it may be too late to get on their good side.
As such, your next step may be to contact a debt counselor from a nonprofit agency to act as a go-between. They can handle communications between yourself and your creditors and help build a debt management plan. Just be wary of for-profit debt settlement companies, as they can cost more in the long run.
If you’ve already been served with a lawsuit, then your options may be far fewer. At this point, it’s time to seek legal counsel to advise you on your situation. They may be able to help you:
- Handle court procedures and appearances
- Negotiate a lower settlement
- Or determine if you’ve surpassed your state’s statute of limitations on debt collection
Bottom Line: What Happens If I Default On a Personal Loan?
If possible, it’s best to avoid defaulting on your personal loans. But when life happens and you find yourself falling behind anyway, you still have options. (Though you should still be prepared for your nonpayment to affect your credit score and future borrowing ability.)
Additionally, we understand that it’s not always feasible not to take out a personal loan, especially if you live paycheck to paycheck. But, if possible, it’s best to have a backup plan that can help you avoid taking out debt in the first place.
That’s right: we’re talking about setting up an emergency savings account. Even if you only save $5 a month, that’s $5 more than you had before. And the bigger your account grows, the less you’ll have to borrow when life throws you a curveball.