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What happens if I default on a personal loan?
What it means and what to expect if you can't pay off your loan.
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. These are often expressed as a percentage of the repayment due, typically around 5%. It's also common for lenders to charge a fixed fee, typically between $15 and $40. Some lenders also charge extra interest, instead of a fee.
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 like SoFi don't charge any late fees, most do. In fact, many lenders that offer no-fee personal loans still charge a fee if your payment is late. Your lender may also charge a fee each time it unsuccessfully attempts to withdraw from your bank account, resulting in a nonsufficient funds (NSF) or returned check fee.
Late payment fees are usually expressed as a percentage, a fixed charge or as additional interest. NSF fees are almost always a fixed, one-time fee and typically range from $15 to $40.
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 so 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 — it counts for 35% of your FICO rating. Even missing one repayment can lower your score and go on your credit report. Defaults 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 honored your contracts and might not be creditworthy. Many reputable lenders won't work with anyone who has defaulted recently. 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
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.
5. Garnished wages
After your lender sends your loan to collections, it might attempt to get a legal judgment to garnish your wages. If it's successful, it'll take funds directly from your paychecks and tax refunds until you've paid off your loan plus any interest.
How much your lender can take from your wages depends on your state. However, the federal government has some guidelines. Your lender is only allowed to garnish wages from your income after taxes. It can also only withdraw 25% of your weekly income (so 50% if you get paid every two weeks) or the difference between your salary and 30 times the federal minimum wage, whichever is less. The federal minimum wage is currently $7.25 per hour.
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. You can even set up a formal contract through programs like Loanable.
- 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 counselor. Struggling with your personal finances in general? Going to a credit counseling agency might be able to help you get back on track and strategize 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 or get a judgment to garnish your wages.
- 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 counseling. Credit counseling 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.
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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.
Need help getting your loan repayments under control? You might want to check out our page on free debt management.
Frequently asked questions
Do I have to repay a loan if I file for bankruptcy?
It depends on your loan and what type of bankruptcy you file for. If you file for Chapter 7, you wont have to pay off your debts. However, you need to demonstrate serious need to qualify for this type of bankruptcy. It's easier to file for Chapter 13, where you'll still have to pay off at least part of your debts based on a payment plan.
How do I find a legit credit counseling agency?
The Department of Justice has a searchable list of government-approved credit counseling agencies on its site. Just select your state and hit Go to find a reputable nonprofit agency near you.
I make money off of tips. Can my lender garnish my wages?
Yes. Your lender can garnish a percentage of any flat salary and any tip credit it claims — typically the difference between your salary and the federal minimum wage. It can't garnish any tips you receive outside of that amount, however.
What happens if I default on other types of loans?
Defaulting on any loan will cause your credit score to take a hit and comes with the risk of legal action. And if your loan was secured with collateral, your lender has the right to seize it and sell it to recoup the losses.
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