What Happens if You Default on a Personal Loan?

When you default on a personal loan, your monthly payment is late by a certain amount of time. Let’s look at what it means to default on a personal loan and the potential consequences.

What does it mean to default on a personal loan?

A personal loan is in default if a monthly payment is late by a certain amount of time – typically 90 days, but this can vary by lender, your loan terms and other details.

If the payment is late by a few days (if you’ve made a partial payment or missed a payment), the loan is delinquent but not yet in default. There may be penalties for missing payments, such as a late fee or increase in APR, and your lender may report your late payment to the credit bureaus.

What are the consequences of defaulting on a personal loan?

Ramifications for defaulting on a personal loan can include damage to your credit score and higher interest rates in the future.

Damage to your credit score

When a lender reports a missed payment to the credit bureaus, you will typically see a drop in your credit score. Late and missed payments can impact your credit significantly.

Higher interest rates in the future

Having a loan in default can impact your credit, which means that lenders may see you as riskier and offer you less favorable terms including higher interest rates.

Debt collection

If a personal loan is in default, the lender may work with an in-house debt collection department or a third party to try and collect the debt. Actions can include contacting you to recover the debt and even taking you to court and trying to find other ways to recover the debt.

What to do if you’re at risk of default

If you’re at risk of defaulting on a loan, there are a few things you can do to be proactive and take steps toward getting back on track.

Contact your lender

Reaching out to your lender may help you avoid having a personal loan in default. Let them know about your circumstances and ask them about your options. They may allow you to defer payments or come up with another payment solution.

Look at your budget

If you have an emergency fund, consider tapping into it to make your payment. If you don’t have access to an emergency fund, consider reworking your budget to reduce nonessential spending. You may be able to free up money to make payments.

Consider debt consolidation

Once your lender has reported missed payments to the credit bureaus, finding favorable refinancing or debt consolidation terms may be tough. But if your credit is still strong, consider debt consolidation. This can be especially helpful if you have other unsecured debts, such as outstanding credit card balances.

Talk to a credit counselor

A credit counselor can help you create a plan to repay your debt and avoid future financial issues. They can help you create a better budget, develop your money management skills and find ways to repay your debt efficiently.

How to avoid defaulting on a personal loan

While financial difficulties are sometimes unavoidable, here are a few things you can do to lower your likelihood of defaulting on a personal loan:

  • Understand the delinquency and loan default policies so you know the potential consequences.
  • Choose a monthly payment and repayment term that you can comfortably afford.
  • Don’t borrow more than you need.
  • Set up an emergency fund, if possible.
  • Consider setting up automatic payments to ensure you never miss a payment.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.