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Defaulting on a Personal Loan: How to Avoid It

What Happens if You Default on a Personal Loan?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated March 3, 2023
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Borrowers who default on a personal loan could face costly legal action and a severe negative impact to their credit scores. Defaulting on a personal loan means you’ve failed to make a required payment to a lender in accordance with the signed loan agreement.Defaulting on a personal loan is an adverse breach of contract that can appear on your credit report for seven years. Below we highlight actions you can take and debt consolidation options you may explore if you default on a personal loan.

What Does It Mean to Default on a Personal Loan?

As mentioned above, defaulting on a personal loan means you’ve failed to make a required payment to a lender in accordance with the signed loan agreement.In addition to payment shortcomings, here are other events that could place you in default of your loan agreement:
  • Providing false statements in your loan application to get approved
  • Failing to provide the lender with requested information, such as proof of income
  • Getting a secured personal loan and selling the collateral without the lender’s consent
Recommended: Guide to Deferring Personal Loan Payments

When Is a Personal Loan in Default?

Banks, credit unions, and private lenders may consider a personal loan in default once a borrower fails to make a regular payment by its due date. A default is considered more serious if you’re 30 to 90 days late on making a required payment. Lenders may accept late payments or partial payments from the borrower to cure a default on a personal loan.Lenders may report a default to the credit bureaus when the borrower is over 30 days late or delinquent on making a required payment. If you default on a secured personal loan, lenders in that case may seize your collateral. Lenders may also attempt to cure a default by requiring the borrower to immediately pay the remaining unpaid balance of the loan.

What Are the Consequences of Defaulting on a Personal Loan?

When weighing the advantages and disadvantages of personal loans, the upside is they can provide you with fast cash to pursue your goals. The downside, however, is borrowers can face serious ramifications if they fail to repay the lender.Here are some of the consequences of defaulting on a personal loan:

Impact on Credit Score

Defaulting on a personal loan can have a major impact on your credit score. As mentioned earlier, a personal loan default can appear on your credit report for seven years. Adverse information on a credit report will lower your credit score and make it harder for you to access new credit. You may want to consider a personal loan deferment instead.


Lenders may seize your collateral if you default on a secured personal loan. Collateral is any asset that you pledge to secure the loan. If you pledge your car as collateral for a secured personal loan, you risk losing your vehicle in the event of default. Lenders do not require collateral for unsecured personal loans.

Debt Collectors

Lenders may hire debt collectors who contact you frequently if you default on a personal loan. Debt collectors may contact you by telephone, email, postal mail, or text message asking you to pay the unpaid debt.

Garnished Wages

Garnished wages is one of the legal consequences you could face if you default on a personal loan. A lender may sue you personally for breach of contract and demand you pay the loan in full and legal fees. A judge may rule in the lender’s favor and sign a court order allowing the lender to take money from your paycheck to settle your debt.

Impact on Cosigner

Cosigners can help borrowers qualify for personal loans, but cosigners are equally responsible for repaying the personal loan debt. Lenders may pursue the borrower and cosigner in the event of default. Cosigners could see their credit scores drop if the borrower defaults on the loan.Recommended: Can You Go to Jail for Not Paying a Loan?

What to Do if You Default on a Personal Loan?

Here are some actions you can take if you default on a personal loan:

Contact the Lender

You may contact the lender if you default on a personal loan and request an opportunity to cure or remedy the default. You can ask the lender to accept a late payment or partial payment from you. You may also request renegotiated loan terms to extend your term and lower your monthly payment.Recommended: Personal Loan Deferment vs Forbearance: The Complete Guide

Consider a Credit Counselor 

You can contact a credit counseling agency and schedule a free debt consultation if you default on a personal loan. A credit counselor can offer guidance on how you may proceed to cure your default.

Learn About Fair Debt Collection Practices Act (FDCPA)

Borrowers in default of a personal loan can learn about their rights under the Fair Debt Collection Practices Act (FDCPA).The Federal Trade Commission enforces the FDCPA, which makes it illegal for debt collectors to use deceptive practices when collecting debts. The FDCPA also gives you the right to stop a debt collector from contacting you.

Consider a Lawyer 

You may consider hiring a lawyer if you default on a personal loan, especially if the lender files a lawsuit against you personally. A lawyer can advise you on how to proceed and can help defend you against civil litigation.Recommended: What Happens to Personal Loans When the Lenders or Borrower Die?

Debt Consolidation Options

Here are some debt consolidation options you may consider if you default on a personal loan:

Credit Cards

Credit card users can take out cash advances from an ATM and use that money to cure a personal loan default. Cardholders may also have the option of issuing a convenience check against their credit limit to repay a personal loan.Creditors may charge fees and interest on cash advances and convenience checks. Taking out a cash advance or issuing a convenience check may not make sense if it doesn’t help you manage your monthly payment obligations. You can compare credit cards online and apply for one that meets your needs.

Refinance Personal Loans

You can refinance personal loans if you need a lower monthly payment and longer term to cure a default. Your lender may be willing to negotiate new terms and conditions to make your monthly payments more affordable.As a consumer lending product, personal loans provide you with a lump sum of money that must be repaid over a set period. Defaulting on a personal loan may cause your credit score to drop by 80 points just for missing one payment.Prioritizing bill payments can go a long way toward improving your credit score.

Debt Settlement

Consumers who default on a personal loan may seek relief through debt settlement. Your personal loan lender may be willing to settle your debt for less than what you owe. You can negotiate a debt settlement agreement with your lender, or you may consider paying a debt relief company to pursue debt settlement on your behalf. Debt settlement may involve debt forgiveness, which may qualify as taxable income if the lender forgave or canceled at least $600 of your debt or more.


You can file a petition in bankruptcy court if you default on a personal loan. The petition can stop most debt collection actions while the case remains active in bankruptcy court. Individuals can file for bankruptcy seeking permanent relief.The court can issue an order discharging most of your debts, including personal loan debt, which can give you a fresh start toward financial freedom.

The Takeaway

Defaulting on a personal loan can damage your credit and make it harder for you to achieve financial freedom. Of the 19.9 million consumers with unsecured personal loans in the fourth quarter of 2021, the delinquency rate of borrowers 60 days past due or higher stood at 3%, according to TransUnion.Lantern by SoFi can help you find affordable rates for personal loans. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice.

Frequently Asked Questions

What are the consequences of defaulting on a personal loan?
How long does it take for a personal loan to go into default?
Do you go to jail if you don’t pay back a loan?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/AsiaVision

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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