Personal Loan Default: What Comes Next?

Defaulting on a personal loan or missing multiple payments can disrupt your financial plans, but you can take steps to address the situation. It’s important to remember that you have options to regain control of your finances.

We’ll explain what default is, how it affects your credit, and the exact steps to take if you’re in this situation. Remember, you have several options and opportunities to turn things around, but taking action as soon as possible is crucial.

What is a personal loan default?

A personal loan default is where the lender gives up control of loan collection because it believes it can no longer collect funds from the borrower. 

When a loan is in default, borrowers may see credit collection agencies, lawsuits, judgments, or wage garnishments. It’s a difficult place to be in, and you’ll want to get on top of it as soon as possible. 

Delinquent vs. default

There’s a difference between your loan being delinquent and being in default. When you miss a single payment, the loan is delinquent. When you haven’t paid for an extended period, and the lender no longer believes it can collect on the loan, it moves the loan into default. 

According to a Q2 2024 TransUnion Credit Industry Insights Report, the delinquency rate for personal loans over 60 days past due is 3.38%—that’s still considered delinquent but near default. This is a bit lower than the 60-day delinquency rate of 3.62% from Q2 2023.

Default timeline

How long does it take for your loan to be considered in default? 

It can vary by lender, but generally, it looks like this:

• Day 1, miss a payment → Loan becomes delinquent, possibly reported to the credit bureaus. Many lenders don’t report payments as delinquent until 30 days from the due date.
• Day 30, first payment still not made, miss a second payment  → Loan is still considered delinquent. The lender will contact you and report it to the credit bureaus.
• Day 60, first and second payments still not made, miss a third loan payment  → Lender will continue trying to contact you to get the loan back on track. Reported to credit bureaus. 
• Day 90, three payments not made, miss a fourth loan payment → Lender may move the loan from delinquency to default. The lender may sell the loan to a collection agency at this point. 

Once it’s in default, the lender takes further measures to recover the money. Keep reading for more about the process most lenders follow when borrowers can’t make their payments and are not responsive to communication. 

What happens if you default on a personal loan?

If you default on your personal loan, what happens next can vary by lender. However, here is what’s typical.

1. Internal debt collection: Your lender will try to collect the debt by calling, emailing, and possibly sending a notice in the mail. It’s wise to answer when your lender calls. You might have options to avoid collections or a lawsuit.
2. Debt sold to a debt collector or collections agency: If you don’t create a repayment plan with your lender, the lender might sell your debt to a collections agency. You’ll get calls and other notices from the collection agency at that point. You can call the collections agency to work out a settlement or payment plan.
3. Lawsuit filed against you: If you don’t pay the collections agency, it can sue you. If the collections agency wins the lawsuit, the court can force you to repay your debt by garnishing your wages, freezing your bank accounts, or placing a lien on your property.

A New York debt attorney explains default

Leslie Tayne

Esq.

A lender’s policies when pursuing defaulted debt will vary, but generally, [it] will take certain steps to recover the debt. The severity of those steps will increase over time. Usually, it starts with the lender contacting you to encourage you to pay the debt. [It] may refer your account to an internal debt collection department, and the debt collector will likely call, write, and message you repeatedly. If the debt goes unpaid, the lender may then sell your account to a third-party debt collection agency, which will take over collections efforts. If you continue to leave your personal loan in default, the original credit or debt collector (whomever currently owns your debt) could decide to file a lawsuit against you to recover the money you owe.

What happens if you default on an unsecured personal loan?

If you default on an unsecured loan, which isn’t backed by collateral, your lender will try to collect the debt by following the steps outlined above. If your lender can’t collect from you, it can sell your debt to a collector. This can result in damage to your credit score and even legal action.

What happens if you default on a secured personal loan?

A secured personal loan is backed by collateral, such as your car or another asset. If you default on a secured loan, your lender can try to repossess your asset to recoup some of its losses.

Like defaulting on an unsecured loan, you’ll likely get calls from your lender or a collections agency. If collectors can’t access your collateral, the lender or collections company can sue you.

What to do if you’ve defaulted on a personal loan

If you’ve already defaulted on a loan but haven’t heard from your lender or a collections agency yet, there are actions you can take. Here are some options ranked from the best one to the last resort.

1. Contact your lender
2. Seek credit counseling
3. Consider debt settlement
4. Bankruptcy (as a last resort)

Contact your lender

Even though you’ve already defaulted, reaching out to your lender is the best first step to take. Often, lenders don’t want to pursue an expensive legal battle. The company may still have options for you.

Seek credit counseling

Another place you can look to for help is a credit counseling agency. Credit counseling organizations are often nonprofit organizations that can help teach you how to manage your money. 

They also can create a debt management plan. With this type of plan, you can make one monthly payment to the agency, and it makes payments to the creditors for you. It may be able to negotiate lower interest rates or extend the loan term to help make the monthly payments more manageable. 

Consider debt settlement

You can also work with a debt settlement company to negotiate a lower payoff amount with your lender. However, this can harm your credit: Debt settlement companies typically instruct you to stop all payments to improve the chances of negotiating a smaller settlement.

A New York debt attorney explains debt settlement

Leslie Tayne

Esq.

If you can’t reasonably expect to catch up, negotiating a debt settlement is another option. This involves paying a certain percentage of your debt in exchange for the lender closing your account and stopping collection efforts for the remainder of the balance. If you pursue this route, it’s a good idea to consult with an attorney who can help with negotiations and ensure that the settlement agreement is sound.

Bankruptcy (as a last resort)

If you’ve defaulted on one loan, you still have options for getting your finances back on track. However, if you’re at risk of defaulting on numerous loans, not just one, contact a bankruptcy attorney to see whether you have options. We only recommend this is a last resort because bankruptcy remains on your credit for seven years.

What to do if you’re at risk of personal loan default

If you’re at risk of defaulting on a loan but haven’t yet, now is the time to take action. Here are steps you can take to get back on track financially, ranked from the most straightforward options to a last resort.

1. Contact your lender
2. Sell an asset
3. Ask for help from friends or family
4. Use your home equity

Contact your lender

When your loan is almost in default, your first step should be to contact your lender, just as if you’re already in default. This might be embarrassing or difficult, but your lender is your best resource for finding ways to become current on your loan.

Sell an asset

If you need to make quick money to avoid defaulting on your personal loan, consider selling an asset you already have. Look around your house. Are you able to sell a piece of jewelry, art, furniture, or something else that can help you get current on your payments?

Ask for help from friends or family

Someone close to you might be willing to help you avoid defaulting on your loan. It can be challenging to borrow money from loved ones, so be sure to set up a repayment plan and honor the agreement by paying them back quickly.

Use your home equity

If you’re a homeowner, you might be able to tap into your home’s equity to access cash and pay your bills. It could be challenging to qualify for a home equity loan or line of credit if you have poor credit, but other options—such as a home equity investment—enable homeowners to tap into their equity without a high credit score.

Using your home equity is a last resort because if you fail to pay your HELOC or home equity loan on time, you could lose your home to foreclosure. A home equity investment doesn’t come with monthly payments. However, because you’re selling partial ownership in your home to the company, try the other options on this list first.

How can your lender help? A debt attorney explains

Leslie Tayne

Esq.

Lenders want to recover as much money as possible, so they may work with you on a modified payment plan, temporarily lower your interest rate or payments, defer interest, or make other modifications to help you get back on track. But this isn’t guaranteed, and lenders aren’t under any obligation to change the terms of your loan. 

Long-term consequences of defaulting on a personal loan

Beyond the stress of dealing with collections agencies and even possible lawsuits or wage garnishments, the long-term consequences of defaulting on a personal loan can be severe: 

• Credit score takes a severe hit. This isn’t like a late payment. When you have an account in collections or a judgment against you, your credit score can plummet. Even if you eventually pay, a default could remain on your credit report for up to seven years.
• Property or possessions can be taken. If your loan was secured by collateral (such as a car or jewelry), the lender can repossess the collateral to recoup its losses.  
• Affects your ability to get loans in the future. With a low credit score, you’ll have trouble getting a loan. Everything from mortgages to car loans will be harder to get—and more expensive. 
• Legal action. The lender could take legal action against you to collect the money. A lawsuit could result in having assets taken from you or garnished wages. 
• Wages could be garnished. If the lender is successful in a suit against you (or you don’t show up or respond), it could garnish your wages, meaning money is taken from your wages before it’s deposited in your account. You no longer have control over your money. 

How to prevent defaulting on a loan

Preventing default on a loan starts early. Making good decisions and understanding the process can help prevent your loan from defaulting.  

Consider before taking out a loan

As of Q1 of 2024, over 20% of consumers report planning to get a new personal loan, and 11% plan to refinance a personal loan in the next 12 months. But is this the right decision? 

Ask yourself the following questions to help determine whether you need a personal loan:

1. Can I delay my purchase until you’ve saved enough for it? 
2. If I get a personal loan to consolidate debt, have I established the financial behaviors to avoid future debt? 
3. Is a credit card with a 0% introductory APR or 0% balance transfer fee a better option?

Set up a budget, and avoid impulsive decisions

A budget ensures you have enough money to cover your expenses each month. To set up a budget, write down your monthly income and expenses. Ensure you have enough income to cover your expenses and avoid impulsive spending decisions that might put you in a monthly deficit.

Your personal loan payment, along with your other bills and responsibilities, goes in the expense column. If you track your budget each month to ensure your spending is in line with your income, that can help you avoid going into default.

Create an emergency fund

Unexpected expenses happen. Basements flood, people have health issues, and appliances break. If you’re not prepared to pay for these expenses, you might be unable to make your regular bill payments, including your personal loan bill.

However, if you create an emergency fund, you’ll have resources to pay for unexpected expenses, which can help keep you on track with your typical monthly bills.

Communicate with your lender

If you’re already late on your payments but haven’t yet defaulted, the most important step is to communicate with your lender. Your lender doesn’t want your loan to default, and the company may have a way to work with you.

Some lenders offer programs, such as enrolling you in forbearance or a one-month grace period. While it might feel stressful or embarrassing to call and let your lender know about your financial struggles, it’s better to find out your options ahead of time.

Tip

Be wary of what companies you work with when you get into credit counseling and debt settlement. Scams abound. The CFPB recommends finding a list of approved credit counselors online or checking with your state’s attorney general or the local consumer protection agency.