When you’re struggling to repay a personal loan, it can be tempting to ignore it. Don’t. Walking away from debt is never a good idea.
If you fail to repay a personal loan, you may incur fees and penalties, damage your credit, have your account sent to collections, and even face a lawsuit.
There are stages for those who can’t make payments, and each stage involves stiffer penalties.
What Happens If I Miss A Payment?
If you fail to make a monthly payment on your loan, you will receive a letter from your lender asking you to catch up on the missed payment. You will usually be charged a late fee.
Your lender will send you an official letter called a “notice of non-payment.” You will find details of your loan, along with terms and conditions that you violated and actions you should take.
At that point, you have what is called delinquency. If you clear the payment and don’t miss any future repayments, your lender won’t take any other action. The late payment will be recorded on your credit report. It’s not the end of the world, but you will see your credit score go down.
If you miss more than one payment, the consequences can be more severe.
Default vs. Delinquency
When you miss a payment, your account is delinquent. When your payment is from 30 to 90 days late, the lender might designate you as “in default.” There is no hard and fast rule about the timing, and it varies by lender.
Each missed payment will be recorded on your credit report, and your credit score will drop.
If the lender categorizes your missed payments as a default, your account may be sent to the lender’s collection department or even charged off and sold to a collection agency.
What If My Loan Goes to a Collection Agency?
When your lender gives up on collecting your debt, the account will be charged off. This is recorded on your credit report and will seriously damage your credit score.
The lender will sell the debt to a collection agency. You are still liable for the debt, but you owe the debt to the collection agency rather than the lender.
Once the debt is owned by a collection agency, it is considered a separate account. The debt is still on your credit report, but the collection account will appear on your credit report under “collections.” A collection account will do even more damage to your credit.
The collection agency will press you as hard as the law permits, and sometimes harder: collection agencies are notorious for going beyond what is legally permissible. Know your rights and learn how to communicate with collection agencies.
A collection agency can sue you for payment. Depending on the outcome of the prosecution, the court may garnish your salary to pay back what you owe.
Can I Go to Jail For Not Paying my Personal Loan?
Being unable to comply with payment obligations can make you anxious and concerned, but you cannot go to jail for not paying a civil debt (you can go to jail for failure to pay taxes or child support).
If a lender or collection agency sues you, though, you need to respond and appear as ordered. You can’t be jailed for not paying a debt, but you can be jailed for contempt of court if you fail to comply with the court’s requirements or instructions.
How Do My Missed Payments Affect My Credit Score?
Payment history is the most important factor influencing your credit rating, accounting for 35% of your FICO rating and 40% of your VantageScore rating.
Failure to pay a personal loan will place a series of negative records on your credit report:
- The original late payment
- Any subsequent late payments
- A charge-off
- A collection account
The damage to your credit score will get larger with each of these steps.
All of these records will remain on your credit report for seven years from the date of the original delinquency, though their impact on your credit score will get lower as they age.
What Should I Do If I Can’t Pay?
As soon as you realize that you won’t be able to make a payment, contact your lenders to explain your situation. Don’t wait until you have missed a payment, and don’t wait for the lender to contact you.
Taking the initiative and making contact early shows your lender that you’re serious about catching up and builds your credibility. This makes it more likely that they will work with you.
Lenders can provide several options to help you. This may include the cancellation of late fees and the ability to delay, adjust or skip certain payments. They can reduce your interest rate or adjust your loan term to reduce your monthly payments.
Deal with the issue by talking to your lender immediately to see what they can do. Not repaying a personal loan can cause severe damage to your credit score, making it more difficult to obtain loans or credit in the future. Default is something you should avoid if at all possible.
