If you can't repay your loan, you will get a default notice warning you that if it happens again you could be referred to a collection agency or taken to court.
There are some steps you can take to avoid defaulting on a loan, such as taking out a debt consolidation loan, or arranging a repayment holiday.
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You may even find that arranging your debts carefully and paying off the most expensive debt first could free up some cash to help make your repayments. Defaulting on your loan can lead to very serious consequences so it's important to do your research before the situation can even get out of control.
Defaulting on a repayment - what happens?
Defaulting on a loan repayments means you have missed a payment or you have failed to to repay the full amount required each month for three to six months.
Usually if it's the first time that this has happened you will get a letter from your loan provider warning you that you need to make up for the missed payment and continue to make payments on time or they will take action.
If you have a secured loan or a hire purchase for a car, then the loan provider will threaten to repossess your home or vehicle to recover the costs.
Loan provider can do one of the following if you default on a repayment:
- Pass your debt to a collection agency
- Take court action
- If it's a secured loan, they can take away the property or car tied to the debt
On top of this, the missed payment will show up on your credit report, which will significantly reduce your chances of being approved for credit cards and loans in the future.
You will also be in arrears, owing even more interest than before. The less you pay back, the more your debt will accumulate. There might also be a fee for missing a payment, so it's best to avoid missing any loan repayments in the first place.
Are you sure you need to miss this repayment?
It's important to keep calm and maintain a hierarchy of debt repayments. If you have multiple debts, calculate which one is the most expensive, and pay that one first, then work your way down.
The most expensive debt will obviously accumulate faster and will be harder to control later on.
Budget accordingly and see if there's a way you can avoid missing a repayment.
Failing that, speak to your loan provider in advance of your repayment date and ask if they can arrange a repayment holiday for you. If they can arrange it, they will add the interest on to the next repayment date, so you will still end up paying more later, but this option could save you from getting a hugely negative mark on your credit score and potentially from a downward spiral of ever increasing debt.
You could also consider taking out a debt consolidation loan or getting a 0% money transfer credit card.
What to do if you miss multiple loan repayments
Defaulting on a loan is likely to lead to severe consequences such as having your debt passed on to a collection agency or being taken to court. If you have a loan secured with a car or your home, then it could be repossessed to recover the costs.
You will also receive a negative mark on your credit report, which will severely impact your credit score and sharply increase your perceived risk when applying for other loans in future.
If you still cannot repay your debts then you may have to file for bankruptcy, which would damage your chances of being approved for a loan ever again.
One option that can be used to avoid the route of bankruptcy is an IVA – an individual voluntary arrangement.
An IVA is an arrangement between the loan provider and the customer which usually agrees to freeze the interest and help cut down the overall amount you need to repay. It will still have a negative impact on your credit score, but it has less of a stigma than bankruptcy (which is announced publicly) and can be dealt with in private.
With an IVA you may still be able to keep your assets and find a solution that benefits the loan provider. It is a formal agreement so failing to keep up with the terms can still result in bankruptcy.
How not repaying a loan affects your credit score
Ultimately, not repaying your loan has a significant negative impact on your credit score. It shows up on your credit report when other loan providers decide to approve or reject your application.
Any missed payment will demonstrate that you can not be trusted with debt and you can not be relied upon to make repayments in full and on time.
If you had plans to get a mortgage in future or take out a credit card, any missed repayment of a loan can really reduce those options and make it extremely difficult to get what you're looking for.
And if you ever want to go down the route of debt consolidation to resolve your rising debt, you will restrict your access to some of the better deals if you have a missed repayment.
Consolidating debt - how it works and should you do it?
Debt consolidation can be an effective way to help clear your debt if you miss a repayment and all other avenues have failed (budgeting effectively, requesting a repayment holiday). Beware that debt consolidation loans will always mean that you have to pay more than you would if you could just pay your debts now, so only use them if you absolutely can't pay your debts now or in the near future.
A debt consolidation loan provider will essentially pay the debts you owe and require you to pay them in one debt repayment plan. They might offer you slightly more flexible terms, but ultimately you still have to keep up with the repayment schedule.
If you can manage to maintain a good credit score (i.e. not missing a repayment) then you could consolidate your debt with a 0% money transfer credit card. These credit cards are usually only available to those with a very good credit score though.
You can use these credit cards to transfer cash to your bank account at a fee of around 3% or 4% of the amount you use. Despite the initial fees, you can then repay your debt at 0% for the length of the offer. Many of the leading 0% money transfer credit cards have interest free periods of 18 months or even longer.
If you take out a 0% money transfer credit card then you should still make a repayment plan for yourself and set up a Direct Debit from your account to ensure you stick to it. Once the 0% offer ends then you will have to pay interest again, and the rates can be quite high on these credit cards.
Who can help you if you’re struggling with debt
If you are still struggling with debt and need advice, speak to any of the following debt advice organisations and charities: