Personal Loans

Personal loan default means you have not upheld your promise to repay the loan amount on time. There are several consequences you might have to face when you default on your loan. We tell you what to expect and how to avoid loan default.

What is Personal Loan Default?

Defaulting on a personal loan means you have not paid your obligation in accordance with your loan agreement. With a personal loan, there may be a grace period available for the loan payment, but default happens immediately after your payment due date is missed. If payment is received after the grace period, a late fee might be assessed.

For example, your payment due date is August 1st and you do not make a payment until August 4th. So on August 2nd, you will already be considered late, but if the lender has a grace period, you may still be able to make a payment after your due date without paying a late fee.

Potential Consequences of Defaulting on Loans

There are some negative consequences for defaulting on your unsecured personal loan.

1. Personal Loan Default Impacts Credit Score

Late and missing payments may result in negative marks that can stay on your credit report for up to 10 years. These marks, even if there is just one, may severely hurt your credit score and they may even make it difficult for you to get approved for a loan or line of credit in the future.

2. Lenders May Take Action to Collect What Is Due

The action will vary depending on the loan agreement and the loan lender. In some instances, you may first incur a late fee after missing the payment due date on your loan. While some lenders offer grace periods (an extended amount of time to make a payment without any fees), you could still be charged a fee for making a payment later than when your monthly bill is due.

3. Considerable Legal Consequences

If you are unable or unwilling to pay your debt, the lender might even turn over your account to a debt collection agency. Some borrowers also worry that they might have to go to jail for defaulting on a loan but there is no reason for this fear: As personal loan default is a civil crime the authorities cannot arrest you for arrears. However, after 180 days with no payment lenders can file a civil case against defaulting borrowers that might lead to a criminal law case and ultimately to a sentence.

In any case, it is a good idea to expect the best but prepare for the worst. Know your rights and discuss matters with your lawyer or a credit counselor.

How to Avoid Loan Default

Defaulting on your repayment to an unsecured personal loan can happen for quite a few reasons, whether it is due to financial emergencies or even just forgetting your monthly due date. A great way to avoid personal loan default is to write your payment date down. Post it on your fridge, at your desk, or set a due-date reminder in your phone.

If you find yourself in a tough financial situation – whether you have lost your job or you are dealing with other financial hardship, there may be options available to you. Communicate your financial situation with your loan servicer. They may consider deferment or forbearance if you feel you will not be able to make your payments on time. Life can be unpredictable at times and so can your financial situation.

What Do I Do When My Loan Is in Default?

You have defaulted your personal loan by accident – keep calm and do not panic. This quick guide will help you handle the situation:

  • Contact the lender and explain the situation.
  • Apply for forbearance or deferment if possible.
  • Talk to your lawyer for legal advice.
  • Speak with a credit counselor.
  • Consider full repayment or debt consolidation.

Personal loan default can cause some extra stress for borrowers. But as with any financial decision, it is important that you try to keep your cool. Best Egg is also here to help you: Check our resources section for plenty of tips on how to navigate financial stress.


April 25, 2019


Learn more about managing debt

Financial confidence starts here

We have the information and insights you need to take control of your financial health.

Get started