Personal Loan Default: What Comes Next?

It’s the end of the month, and there’s no money left. You’re starting to get behind on bills, and you’ve already missed two payments on the personal loan you took out. You might worry about what will happen when you default on your personal loan. 

It’s nerve-wracking—but your lender may be willing to work with you. You have several options. It’s essential to act fast so you know what comes next if you default on your loan.

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 2023 TransUnion Credit Industry Insights Report, the delinquency rate for personal loans is 3.8% for loans over 60 days past due, which is still considered a delinquency but near default. With over $241 million in outstanding balances in the U.S., that’s over $9 million in delinquent loans each year. 

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 money from you. 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?

What happens when you default on a personal loan can depend on how much you owe and your lender’s policies. 

Generally, you’ll see the following default process:

1. Internal debt collection
2. Debt sold to a debt collector or collections agency
3. Lawsuit filed against you

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.

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 takes a dive. Even if you eventually pay, a default could remain on your credit report for up to seven years.
• Property/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 against you 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.  

Think carefully before taking out a loan

Almost one-third of consumers report planning to use a personal loan in 2024, but is it 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 & avoid impulsive decisions

A budget ensures you have money for what you need and want each month. Need help determining your budget? Our personal loan calculator can help.

Communicate with your lender

If you’re already late but haven’t yet defaulted, the most critical step is communicating with the lender. Your lender doesn’t want your loan to default, and it may have tools to work with you. 

What to do if you’re facing loan default

If you act as soon as possible, more loan default options may be available. 

Contact your lender

When your loan is in default, it’s best to contact the lender as soon as possible. 

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. 

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

What if you’re far behind on payments?

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.

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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.