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What Borrowers Should Know if They Default on Their Loan

Most people don't want to think of their personal loans defaulting, but it does happen. If you fail to meet your monthly payments by at least 30 days, your credit score will likely take a hit. You could prevent this by contacting your lender about your situation. Some institutions offer short-term relief, especially for borrowers directly affected by the COVID-19 pandemic.

In some situations, though, maHere are the things you should know and steps you should take if you default on your loan.king internal arrangements is impossible. Still, you can mitigate the harmful effects of missing your payments.

What Does it Mean to Default on a Loan?

You default on a loan when you make late repayments. Depending on the type of loan, the lender, and the terms you agreed to, you are in default if you make the payment 30 to 90 days after the deadline.

Personal loans are delinquent if the payment is a few days late—however, they aren't in default. If you make a payment after the ten- to 15-day grace period, your lender could charge you a late fee of approximately $15 to $40. Some places ask for five to ten percent of the payment due. The lender cannot report your payments as late if it hasn't been 30 days since the deadline.

Your credit score can go down by as much as 100 points if you have a late payment on your record—a significant change, especially for borrowers whose scores are at the cusp of Good or Excellent on the FICO scale. What's more, defaults stay on your credit report for up to seven years, making it challenging to reapply for a new loan.

What Happens if I Default on a Personal Loan?

When a loan defaults, the lender can move the unpaid balance to their collections department or sell it to a debt collector. When this happens, collection agents will contact the borrower through calls, text messages, emails, or letters to settle the debt. In the case of unsecured loans, lenders or debt collectors can go to court and seek repayment.

Just because there's no property to seize doesn't mean lenders cannot get you to pay them back. Usually, they take wage garnishment or place a lien on your house or other assets as repayment for unsecured loans.

Meanwhile, if the loan is secured by assets like cars, investment accounts, or savings, the lender has the right to seize it to recover losses. This arrangement would be in the loan agreement the borrower signed. Also, if you have a co-signer or co-borrower, that person must pay up if you default.

What Should I Do if I Default on a Loan?

Keep in mind that defaulting on a loan is a tough but manageable situation. You have to do everything you can to pay on time, but if you do default on a loan, remember the following:

  1. Know Your Rights: The Fair Debt Collection Practices Act or FDCPA outlines borrowers' rights, including protections when their loans are in default or have entered collections. Defaulting on a loan is difficult—no need for it to be even more challenging because of debt collectors' abusive, deceptive, and unfair practices. You can file complaints with the Consumer Financial Protection Bureau if a collector is harassing you. Contacting your state's attorney general is also an option.

  2. Speak to a Lawyer: If the collectors have served you a lawsuit, it is best to seek legal help. You would have to appear in court to avoid an automatic ruling in favor of your lender or debt collector, and having a lawyer will level the playing field and help you achieve an outcome you'd like.

  3. Consult a Credit Counselor: Preventing a default is much easier than dealing with one. Avoid going into default by creating a new budgeting plan and staying current with your financial accountabilities. Working with a credit counselor will help you stay on top of all your debts.


People who sign loan agreements often have the best intentions when they do. They want to make a big-ticket purchase, refinance an existing home loan, or fund other needs, and they fully intend to repay the amount they take out. Life happens, though, and unexpected injury, divorce, or job loss could make people miss their payments and default on the loan. Borrowers should know their options if that happens.

Your well-being is our highest priority at Gadsden Finance. We are a loan company in Gadsden, AL, offering a range of personal loan sizes with no hidden fees. Get in touch with us and learn how you can get an affordable payment plan today!

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