I can’t afford my personal loan. What should I do?

There may be more resources at your disposal than you realize

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Borrowing money is a way of life these days. People use debt to buy a home, get a car or finance college. But while this debt helps us to make major purchases when we need them, it can also get us into trouble.

Too much debt can lead to stress, damage to your credit score and a lack of money for other goals.

If you can’t afford your personal loan, make sure you understand the stages of default, what the consequences are and steps you should take to repair your finances.

Key insights

  • There are four primary stages of default: delinquency, grace period, late payment and default.
  • Consequences of default could include penalty fees, higher interest rates, a lower credit score and repossession.
  • Contact your lender at the first sign of trouble to see if you qualify for programs that can make your payments more affordable.

What is defaulting on a loan?

When you take out a loan, it typically comes with a predefined repayment schedule. The schedule dictates how much your payments are, when they are due and how long the repayment time frame is. If you miss a payment or the payment arrives late, your loan is in the early stages of default.

Paying the missed payment(s) brings your loan back into good standing. However, if you stop making payments altogether, you’ve now fully defaulted on your loan.

What are the stages leading up to default?

Defaulting on a loan is typically a series of steps, rather than a single action. The steps and timelines may vary for each lender but generally follow this pattern:

  • Delinquency: When you miss a payment or the payment is late, your loan is technically in default because you are not meeting the terms of the loan.
  • Grace period: Some lenders offer a grace period after the due date. If you make your payment during this grace period, your late payment will not be reported to the credit bureaus. However, the lender may still charge a late fee.
  • Late payment: Creditors typically report late payments to the credit bureaus when you haven’t made a payment for at least 30 days. Late payments can stay on your credit report for up to seven years.
  • Default: If you continue to miss payments, you are in full default and the lender is unsure if it will recoup its loan.

Grace periods and late fees can vary depending on the lender and the type of loan. For example, a "homeowner usually has a grace period of 15 days when their mortgage payment is due at the start of the month,” said David Lee, a real estate agent with the David Lee Group Yorba Linda, California. “Often, late fees will apply if the lender receives a payment after the grace period."

Consequences of defaulting on a loan

Not only will defaulting on a loan impact your relationship with your current lender, but it can also impact your relationship with future lenders.

  • Late fees: Missed payments lead to late fees with most lenders. Lenders typically charge a flat fee or a percentage of your missed payment.
  • Higher interest rates: The lender may increase the interest rate on your loan when you’re in default. This can make it even harder to pay off your loan. Your default could also trigger higher interest rates on other loans, even if those payments are current.
  • Collection calls and letters: When your loan is in default, lenders usually start calling you and sending letters attempting to collect the debt.
  • Derogatory credit marks: Lenders generally report loan details to the three major credit bureaus each month. Your missed payment(s) or default status can negatively impact your credit score and make it harder to borrow money in the future.
  • Repossession: The lender can repossess your car, boat or other assets purchased with the loan.
  • Loss of collateral: Any other collateral used to secure your loan is also at risk. The lender could seize the collateral or place a lien against it in order to repay some or all of the loan.
  • Lawsuits filed against you: If the lender is unable to collect what it's owed, it may take you to court. A court-ordered judgment allows the lender to go after your income and assets to get its money.
  • Difficulty with future loan applications: Future lenders will see your loan default on your credit report and may decline your application. If you are approved, those loans may have unfavorable terms, including higher rates and more fees.

» MORE: Good debt vs. bad debt

Steps to take if you can’t repay your personal loan

If you’re having difficulty repaying your personal loan, don’t give up hope. Follow these simple strategies to improve your financial situation and bring your loan current.

Reassess your situation

Look at what's causing your inability to repay your loan. Is this situation temporary, or is it long-term?

  • For temporary situations, you might be able to sell assets, work extra hours or borrow from friends and family to cover your shortfall.
  • If the situation is ongoing, you'll need to make permanent changes to your income and spending habits to make payments more affordable. Otherwise, you'll need to get out from under that loan since its payments are too much for your budget.

Brainstorm your resources

Your income is only one of many resources you may have available to pay your debt.

  • Do you have any other assets that you can sell or borrow against?
  • Has your home equity, stocks, cash value life insurance or other assets increased in value so you can borrow against them?
  • Does your company retirement plan allow 401(k) loans?
  • Can you borrow from friends and family to pay off the loan and repay them under more favorable terms?

Consider refinancing

By refinancing your debt, you may be able to obtain more favorable terms. A longer repayment period or lower interest rate can reduce your monthly payment amount.

This option is best for people who are still current on their loans. Once you start missing payments, the negative effects on your credit score could make it harder to get a loan with favorable terms.

Get free assistance

If you're facing money problems, you don't have to go it alone. Credit counseling agencies can help you craft a budget, create a debt repayment plan and negotiate with creditors. Many also offer financial education resources to improve your money skills.

Services at these agencies are generally available at no charge or with minimal fees.

» COMPARE: Best credit counseling services

Reach out to your lender

When you're having trouble making payments, don't be afraid to tell your lender. While the lender does want to get paid in full, many have resources and alternative payment plans that can keep your loan current.

Your lender may be able to restructure your loan, offer a payment deferral or refinance your loan before missed payments affect your credit.

Make lifestyle changes

Changing the way you spend not only makes it easier to pay your loan on time but also allows you to save for your goals. Creating a spending plan for your money provides the structure of a budget, but its emphasis is spending on what's most important to you. That plan should include building an emergency fund and setting aside money for retirement.

Also, consider ways to earn more money. While it’s not an option for everyone, could you start a side hustle, get a weekend job or learn skills to qualify for a better position?

» MORE: How to manage your money

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    What happens if I miss a loan payment?

    When you miss a loan payment, it starts a chain reaction of events. Lenders typically charge a late fee if your payment arrives after the due date. The lender may contact you by phone, email or regular mail notifying you that it hasn't received your payment. If you go a full statement period without paying, the lender adds a 30-day late notice to your credit report. Continued nonpayment can lead to additional fees, higher interest rates and collection activity, including repossession, lawsuits, liens and more.

    Can you negotiate with creditors?

    Yes, you can always negotiate repayment terms with creditors. However, many creditors are unwilling to negotiate until they feel that you are unable to repay. A nonprofit organization or paid service may be able to negotiate a debt settlement agreement, lower payments or other relief on your behalf.

    What is loan restructuring?

    Loan restructuring is the process of adjusting the loan terms to make payments more affordable. Depending on your circumstances, the lender may extend the repayment term, reduce your interest rate or adjust the remaining balance. The lender may also provide a payment holiday or graduated repayment schedule to provide further assistance.

    When do debt collectors give up?

    When you've defaulted on a debt, lenders typically attempt to collect for 180 days. At that point, they write off the debt and may sell it to a collection agency. The collection agency can pursue the debt in perpetuity or until your state's statute of limitations applies. Take note that if you make any payment to the collection agency, the clock restarts on the collection timeframe.

    Bottom line

    Although you're technically in default once you miss a single payment on your loan, you still have time with most lenders before they take drastic action. This gives you an opportunity to take action to keep your loan current. Consider restructuring your debt, refinancing the loan, cutting expenses or selling assets.

    While you may be tempted to ignore calls and letters from your lender, it’s better to explain your situation to them to see if you qualify for programs to stay current with your payments.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Experian, " How Long Do Late Payments Stay on a Credit Report? " Accessed Aug. 25, 2023.
    2. California Mortgage Association, " Default Interest Rate: The Shock Factor ." Accessed Aug. 25, 2023.
    3. Experian, " What Is Debt Restructuring? " Accessed Aug. 25, 2023.
    4. Debt.org, " What is Debt Recovery? " Accessed Aug. 25, 2023.
    5. Federal Trade Commission, " Debt Collection FAQs ." Accessed Aug. 25, 2023.
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