What Happens if You Don’t Pay Back a Personal Loan?

Quick Answer

When you don’t pay back a personal loan, you could face negative effects including: Fees and penalties, defaulting on your loan, your account going to collections, lawsuits against you and a severe drop in your credit score.

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Personal loans have become a popular way to consolidate debt or finance unexpected expenses. In 2021, the average personal loan balance was $17,064—up 3.7% from 2020, according to Experian data.

But what happens if you can't make the payments on your personal loan? When you stop paying a personal loan, it could result in your account going into default, the balance being sent to collections, legal action against you and a significant drop in your credit score. If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.

What Happens When You Stop Paying a Personal Loan?

What can you expect when you stop repaying a personal loan? That varies depending on your loan terms and when you missed your first payment. However, the following timeline will give you an idea of what usually happens at various stages.

0 to 30 Days

Lenders don't report missed personal loan payments to credit bureaus until one billing cycle (typically 30 days) has passed. If you can manage it, bringing the account current before that date can prevent the late payment from damaging your credit score.

Depending on your lender, however, you may face fees and penalties if your payment is just one day late. These can vary from as little as $25 to as much as 5% of the outstanding loan amount.

30 to 60 Days

Once your payment is at least 30 days past due, your account is considered delinquent, and your lender may report the missed payment to credit bureaus. This negative mark will remain on your credit report for as long as seven years.

60 to 90 Days

The lender will continue to contact you requesting payment. If you don't pay, the missed payments will appear on your credit report in 30-day increments.

90 to 120 Days

After three to six months of missed payments (the exact time frame depends on your lender), your account transitions from delinquency to default status. Defaulting on a loan means you've failed to repay the loan according to the terms of your loan agreement.

120 Days or More

A lender will typically "charge off" your account after six months of missed payments (although some may do this sooner). A charge-off appears on your credit report and indicates that the lender has given up trying to collect the money from you. Instead, the lender generally sells the debt to a third-party collection agency. You're still responsible for the debt, but the collection agency, rather than the lender, takes over attempting to collect.

Once the debt is in the hands of a collection agency, it's considered a separate account. The charge-off remains on your credit report, but the collection account will show up on your credit report under "Collections." The collection agency might sue you to get payment. Depending on the outcome of the lawsuit, the court might put a lien on your home or garnish your wages to repay what you owe.

Even if you've missed a payment or two, there are things you can do to prevent your personal loan from getting to this stage and minimize any impact on your credit score.

Do whatever you can to bring your account up to date before it's in default. For instance, look for ways to squeeze more money out of your budget, think of ideas to make extra money or borrow money from a friend or family member. If you can't get your hands on the extra cash you need, contact the lender. Be honest and let them know you're having trouble making payments. They may be willing to work with you to adjust the terms of your loan or set up a new payment plan.

How Not Paying a Personal Loan Affects Your Credit

Failing to repay a personal loan can have significant negative effects on your credit score. The longer you go without paying, the more those harmful effects can snowball. Here's an overview of how missing personal loan payments can affect your credit.

  • Because payment history is the most important factor in your FICO® Score , accounting for 35% of your score, even one missed payment can damage your credit. If you have a long history of good credit, a single missed payment may not cause a huge decline in your credit score. If you have a thin credit file (few credit accounts on your credit report), however, your score could drop significantly.
  • The longer you continue to miss payments, the more damage is done. Each additional missed payment shows up on your credit history, often further lowering your credit score.
  • When your loan moves from delinquent to default status, it leaves a still more serious derogatory mark on your credit history. Even if you pay off the debt, your credit report will show the account's negative payment information for seven years after the initial date of delinquency.
  • Unless you bring the account current, your loan will eventually be charged off and may be sold to a collection agency. This creates a charge-off and potentially a new collections account on your credit history, each of which has a negative impact on your credit score.
  • If the collection agency successfully sues you, the court might garnish your wages. With less income to rely on, you might fall behind on other payments, further impacting your credit score.

The Bottom Line

When you're having trouble paying back a personal loan, it can be tempting to hide your head in the sand. Don't. Get out in front of the problem by talking to your lender right away to see what they can do. Failing to repay a personal loan can seriously hurt your credit score, making it harder to get loans or credit in the future, so it's something to avoid if at all possible.

If finding the money to pay your bills is an ongoing problem, consider getting credit counseling from a reputable agency. They can help you learn to better manage your money so you can make your debt payments. As you work to improve your credit, check your credit report regularly to make sure it's up to date. Consider signing up for free credit monitoring services so you can watch your progress.