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What Happens When You Can't Pay Back Your Personal Loan

Written by
Alex Huntsberger
Alex Huntsberger is a personal finance writer who covered online lending, credit scores, and employment for OppU. His work has been cited by, Business Insider, and The Motley Fool.
Read time: 5 min
Updated on October 24, 2023
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If you default on your personal loan, you may enter a world of debt collectors and garnished wages. Instead, try talking to your lender first.

Nobody (okay, very few people) takes out a personal loan with the intention of defaulting it. Failing to repay can result in accruing late fees or getting hounded by debt collectors. Does that sound like something you want to sign up for?

Yet, it can happen due to job loss, an unexpected medical emergency car repair that ends up capsizing your budget, etc. Regardless of the reason, you might end up in a position where you’re not just behind on your loan payments, but you, also, aren’t able to repay your loan obligation (for more on personal loans, check out the OppU article "What is a Personal Loan?").

Here’s what happens when you can’t pay back your personal loan…

Racking up late fees.

The first thing that may happen when you miss your due date for a loan payment is the accrual of a late fee. This fee will be an additional amount to be paid onto your existing loan. The amount of the fee may vary, however, that information should be available on your loan agreement or on your lender’s website.

If you’re able to get back on track with your loan payments, these late fees will be incorporated into your total repayment obligation. They will likely be added onto what you owe on your next payment. If you’re able to pay that larger amount, you’ll be back on track. Well, mostly...

Damage to your credit score. 

If you miss a payment, it may be reported to the bureaus, and this may negatively affect your credit score. One late payment can do some hefty damage to your score, and a few missed payments within a short period may cause more havoc. The more payments you miss, the closer you get to…

Defaulting on your loan. 

Defaulting on a loan indicates that you have failed to fulfill the obligation per your loan agreement. Once you default, your creditor knows that you are unable to repay the loan. They may then switch into collections mode, either sending you to an in-house collection team or selling your debt to an outside debt collector.

At what point your loan will go from “behind in payments” to defaulted is uncertain as the point of default is different depending on the laws in your state and the terms of your loan. One lender may give you 90 days or more before declaring a default, while others may call it after 30 days.

Debt collectors calling you. 

The job of a debt collector is to get you to repay as much of your unpaid debt as possible. While there are many ethical debt collectors, there are some who may use unethical and illegal tactics to make you pay the unpaid debt. Learn more about your debt collection rights in our article, What Debt Collectors Can and Can’t Do.

Rather than ignoring a debt collector's calls, you should talk to them and do your best to negotiate. Most collectors may be willing to settle for a reduced amount rather than pressuring you for the entire debt. Try and settle for a smaller amount. That way you can close the account and move forward.

Going to court and having your wages garnished.

This is another good reason not to avoid a debt collector’s calls. In certain situations, if a debt collector (or the original lender) is unable to get you to pay at least a portion of what you owe, there’s a very good chance that they may seek a legal remedy. They may take you to court and seek a garnishment on your wages. This means a portion of your income may be deducted from every paycheck to be paid until your debt is satisfied. Be warned: the amount you owe could also include court fees, making it even harder to get out of debt.

Talk to your lender.

While no lender likes to get a call from a customer saying that they won’t be able to repay their loan obligation as agreed, that doesn’t mean that they won’t be able to provide them assistance (although it does not mean they will be willing to help, but it doesn’t hurt to try). Give them a call, explain your situation, and inquire if there is anything they can do to assist you.

Maybe it’s as simple as changing your monthly due date so that it doesn’t overlap with your other bills. Additionally, you can request a lower interest rate or refinancing to decrease your monthly payments. Whatever solution you are able to agree upon, it is preferable than defaulting on your loan and damaging your credit score.

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