What happens if I default on a personal loan?

What it means and what to expect if you can't pay off your loan.

Last updated:

Defaulting on a personal loan can be expensive and can do some serious damage to your credit. But being informed can help you get back on the path to financial wellness. We break down what defaulting means, its consequences and what to do if you’re about to miss a payment or already have.

When is a personal loan considered in default?

It depends on your loan type, lender and the terms of your specific term agreement. Many personal loan contracts consider your loan to be in default 30 days after you miss a repayment. Some give borrowers 60 or 90 days before it’s considered in default.

Often, a lender won’t report a repayment as late to a credit bureau until around 30 days after it was due. That means that most of the time, any repayment under 30 days late won’t hurt your credit score. To know your loan’s specific terms for default, check your loan contract or contact your lender.

What happens if I miss one payment?

Your loan won’t necessarily be in default if you’re late and you might not even have to pay a fee. Many lenders offer a grace period before a late payment charge kicks in, typically around 10 to 15 days.

After that, you’ll be on the hook for a fee. According to the Ministry of Law’s regulations, moneylenders are only allowed to charge a maximum fee of S$60 per month of late repayment.

5 consequences of defaulting on a personal loan

A personal loan default can affect your life in several different ways. Many people start getting lots of phone calls from debt collectors after they default and some even face legal action from their lender. Here are five things that might happen if you don’t make that repayment within 30 days of its due date.

1. Additional fees

While some lenders don’t charge any fees — even if you’re late — most do. In fact, many lenders that offer no-fee personal loans charge a fee if your payment is late and if it’s unable to withdraw the full amount from your bank account. For each repayment you miss, you’ll have to make a late repayment fee. Each time your lender unsuccessfully attempts to withdraw from your bank account, you’ll have to pay a non-sufficient funds fee — sometimes called a returned cheque fee.

As we mentioned earlier, you’ll have a grace period before these kick in. And after that’s over, you’ll be charged a late payment either expressed as a percentage, a fixed payment or an additional interest. Nonsufficient funds fees are almost always a fixed, one-time fee. Like late fees, these typically around S$40 and are often the same amount as the late fee if it’s fixed.

If you think you’re going to miss a repayment, you might want to stop automatic repayments. That way, your lender won’t try to unsuccessfully access your bank account and you’ll only pay a late fee.

2. Lower credit score

Your repayment history is one of the most important factors in your credit score. Even missing one repayment can lower your score and go on your credit report. More than 2 late payments will start bringing your score down, and a default can stay on your credit report for over seven years.

3. Harder to qualify for future credit

Having a default on your credit report tells a lender that you haven’t always honoured your contracts and might not be creditworthy. Many reputable lenders won’t work with anyone who has defaulted recently and it’ll take at least for the 3 years after you’ve settled the loan post-default for them to consider approving a new loan application. Even if a lender will, having a bad mark on your credit report can make it difficult for you to qualify for competitive rates on personal loans, credit cards, mortgages, car loans and any other type of financing.

4. Lose collateral or risk legal action

Thought you’d save on interest by taking out a secured loan? That collateral is no longer yours once you default on your loan. If you used your car or another possession as collateral, your lender will send someone to collect it. If you backed your loan with a bank account, then it’ll collect whatever funds you have in it up to the amount that you owe.

If you default on an unsecured loan, your lender will move to the court for a settlement. Since personal loans are largely unsecured loans, legal actions may lead to having your bank accounts seized. Depending on your case, there’s a possibility that the lender might go for settlement of the dues at a negotiated amount. If you have no means to pay for the settled sum, you may also risk having one or more of your assets repossessed by the lender.

5. Loan tenure extension

Many lenders also extend your loan tenure by as many instalments as you skip. On top of late payment charges, a tenure extension would increase the total amount you pay back to the lender.

Worried you might default on your personal loan? Here’s how to avoid it

Fortunately, there are steps you can take to prevent your loan from going into default. If you think you’re going to miss that next repayment, you might want to do some or all of the following:

  • Contact your lender. Calling or visiting your lender in person might be the fastest way to alert your lender that you might have trouble making a repayment. Many are willing to work with borrowers that think they might default by adjusting your loan term to lower your repayments or taking other steps to make sure you don’t miss a repayment.
  • Ask your family and friends. In times like these, your social safety net might come in handy. Explain the situation to a relative you trust and ask if they can help you out.
  • Talk to your employer. Some companies might be willing to give you a pay advance if you’re in a tight spot with a lender. Ask your human resources department what your employer’s policy is for advances.
  • Talk to a credit counsellor. Struggling with your personal finances in general? Going to a credit counselling agency might be able to help you get back on track and strategise about how to avoid missing a repayment.

Already in default? Here’s what to do next

The sooner you can get out of default, the faster you’ll be able to start building your credit. While that negative mark will stay on your credit report for at least seven years, you can start taking steps to regain your financial health right away.

  • Pay your late payment and fees. Just missed the cutoff for late payments? Try to pay off that late payment and fee before it goes to collections. If you let it sit too long, your lender could sue you for repayment.
  • Negotiate a settlement. Already in collections? You might be able to negotiate your debt down to a large one-time payment. You can do this on your own or hire a debt settlement company to do it for you — though you’ll want to make sure you’re working with a reputable organization.
  • Get credit counselling. Credit counselling can also help after you’ve already defaulted on your loan by helping you come up with a debt management plan for paying off your loan and staying out of debt.

Bottom line

Defaulting on your personal loan can have serious consequences that follow you around for longer than even seven years. No matter if you’re about to default or already have, it’s crucial to take action as soon as possible. Aside from the fees and the potential legal consequences, the longer you let your loan sit unpaid, the more you’ll owe in interest.

Frequently asked questions

Back to top

Picture: Shutterstock

Ask Finder

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy Policy and Terms.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site