What Happens If I Default on a Personal Loan?

You had every intention of repaying your personal loan. But then life happened — maybe an unexpected job loss, injury or divorce — and now you’ve missed a payment and you’re facing default.

Defaulting on a personal loan means your monthly payment is overdue. It can cause your lender to send the loan to collections, and your credit score may take a significant hit.

Here’s what to expect if you default on a personal loan, and steps to take now if you face default.

When is a personal loan in default?

Typically, a personal loan is in default when a payment is late by 90 days. The exact timing depends on the type of loan, the lender and the terms of your loan agreement.

Personal loans are delinquent, but not in default, if a payment is just a few days late. You may be charged a late fee after a grace period of about 15 days. The fee can be charged as a dollar amount (around $10 to $30) or a percentage of the payment due (typically 5% to 15%).

The payment must be at least 30 days past due for the lender to report it as a late payment to the three major credit bureaus (Equifax, Experian and TransUnion).

» MORE: How long do derogatory marks stay on your credit report?

Personal loan default consequences

Late payments reported to the credit bureaus can knock as much as 100 points off of your FICO credit score if you have good to excellent credit (690 to 850).

Missed payments not only damage your credit score; they also stay on your credit report for up to seven years and can make it harder to qualify for new credit or get a low interest rate.

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Once your loan is officially in default, the lender either moves the unpaid loan balance to an in-house collections department or sells it to a third-party debt collector. You may receive phone calls, letters, e-mails or text messages from the collection company to recover the debt.

If your loan is unsecured, the lender or debt collector can take you to court to seek repayment through wage garnishment or place a lien on an asset you own such as your house.

If the loan is secured by an asset such as your car, savings or investment accounts, the lender has the right to seize the asset to recover its losses, as stated in the loan agreement.

For example, if the loan was secured by a car title, the lender may send a letter demanding payment. It can repossess the vehicle if not repaid within the specified time frame.

Finally, if you have a co-applicant on your loan, whether a co-signer or co-borrower, that person is on the hook to repay the loan if you default.

» MORE: Sued for debt? Here’s what to expect

What to do if you face loan default

Contact the lender: Be proactive and call the lender before your next payment is due. The lender may be able to provide some relief — such as temporary suspension or deferment of loan payments — if you explain your situation.

Know your rights: Understand your rights under the Fair Debt Collection Practices Act (FDCPA) if you face default or if your debt has already entered collections.

It’s illegal for debt collectors to use abusive, unfair or deceptive practices when attempting to collect on debts. If a debt collector is harassing you or breaking the law, you can file a complaint with the Consumer Financial Protection Bureau and contact your state’s attorney general.

Contact a lawyer: If you’ve already been served with a lawsuit, seeking legal help is likely your best course of action.

You’ll need to appear in court to avoid a default judgment in which a judge resolves the case and automatically rules in favor of the lender or debt collector.