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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 July 27, 2023
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If you default on your personal loan, you're going to enter a world of debt collectors and garnished wages. Instead, try talking to your lender first.

Nobody (okay, very few people) take out a personal loan with no intention of paying it back. Doing so can mean piling up late fees, getting hounded by debt collectors, or even ending up in front of a judge and having your wages garnished. Does that sound like something you want to sign up for? No, us neither.

And yet, it still can happen. Maybe you lose a job or have an unexpected medical emergency or car repair that ends up capsizing your budget. Whatever the reason, you might end up in a position where you’re not just behind on your loan payments, you aren’t able to pay the loan back at all. (For more on personal loans in general, check out the OppU article "What is a Personal Loan?")

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

Racking up late fees.

The first thing that will happen if you miss your due date for a loan payment is a late fee. This will be extra money added onto what you already owe. The size of the fee will vary, but that information should be pretty easy to find on your loan agreement or on the lender’s website.

If you’re able to get back on track with your loan payments, these late fees will simply become a part of what you have to pay back. They will likely be added onto what you owe on your next payment. But 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 by a few days or even a week, it likely won’t be reported to the credit bureaus. This is good, because once it’s sent over to the bureaus, it will get added to your credit report and will negatively affect your credit score. One late payment can do some hefty damage to your score, and a few within a short period will really wreak some havoc.

Once you get past 30 days, that’s when your late payment will get reported. As it passes the 60 and 90-day mark, the damage to your score will only increase. It’s always worth it to get caught up on late payments if you can, even if damage has already been done. The more payments you miss, the closer you get to …

Defaulting on your loan. 

Defaulting on a loan means that you have failed to live up to your end of the loan agreement. Your creditor knows you aren’t going to pay them back as hoped, so they’ll switch into collections mode, either sending you to an in-house team or selling your debt to an outside debt collector.

There is no way to know for sure at what point your loan will go from “behind in payments” to straight defaulted. This is because the point of default is different depending on the laws in your state and the terms of your loan. One lender might give you 90 days or more before declaring a default, while others might call it after 30.

Debt collectors calling you. 

The job of a debt collector is to get you to pay back as much of your unpaid debt as they can. And while there are many upstanding debt collectors out there, it’s a fact of life that many other debt collectors will try and use dirty and downright illegal tactics to make you pay up. Learn more about your debt collection rights in our post, What Debt Collectors Can and Can’t Do.

Rather than ignoring a debt collector's calls, you should do the opposite: talk to them and do your best to negotiate. Most collectors will be willing to settle for a guaranteed lesser sum rather than continue pressuring you for the whole thing. Try and settle for a smaller amount. That way you can get the account closed out and move on.

Going to court and having your wages garnished.

This is another good reason to not avoid a debt collector’s calls. If a debt collector (or the original lender) can’t get you to pay at least part of what you owe, there’s a very good chance that they’ll seek a legal remedy. That’s right, they’ll take you to court and ask a judge to rule in their favor.

If that judge does issue in your creditor’s favor, they’ll institute a garnishment on your wages. After taking your living expenses into account, the garnishment will set aside a portion of your income from every paycheck to be paid to your creditor until your debt is cleared. Be warned: the amount you owe could also include court fees, making it even harder to get out of debt.

Talk to your lender.

No lender likes to get a call from a customer saying that they won’t be able to pay their loan as agreed, but that doesn’t mean that they won’t be willing to help. (It doesn’t mean they will be willing to, either, but it doesn’t hurt to try.) Give them a call, explain your situation, and ask them if there is anything they can do to help you out.

Maybe it’s as simple as changing your monthly due date so that it doesn’t overlap with a bunch of your other bills. It might also mean asking for a lower interest rate or refinancing your loan to decrease the amount you’re paying each month. Whatever solution you are able to arrive at with them, it’s certainly preferable to defaulting on your loan altogether and dealing with the damage to your credit score.

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