Opens in a new window
Defaulting on a personal loan means that your monthly payment is late by a certain amount of time. The timing can vary by lender, but there are several things that can happen once you enter default, from credit score damage to debt collection.
Let’s look at what it means to default on a personal loan, the potential consequences and tips to help avoid default.
A personal loan enters default when a monthly payment is late by a certain amount of time – typically 90 days, but this can vary based on lender, your loan terms and other details.
Prior to default, late payments (which can include partial payments) are considered delinquent. There may be penalties for missing payments, such as a late fee, and your lender may report your late payments to the credit bureaus.
Defaulting on a personal loan also comes with certain consequences.
Ramifications for defaulting on a personal loan can include damage to your credit score, higher interest rates in the future and debt collection.
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 also remain on your credit report for 7 years.
Because having a loan in default impacts your credit score , lenders may see you as riskier and offer you less favorable terms, such as higher interest rates, if you try to borrow money again.
If a personal loan is in default, the lender may take steps to try to collect the debt.
That means they may:
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.
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 set up a new repayment plan.
If you have an emergency fund, consider tapping into it to make your missed 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 and avoid default.
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 high-interest debts, such as outstanding credit card balances.
A credit counselor can help you create a plan to help you 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.
While financial difficulties are sometimes unavoidable, there are several things you can do to help lower your likelihood of defaulting on a personal loan:
Managing debt is an important part of most people’s financial lives. Whether you’re looking to consolidate your debt or finance an emergency home repair, Citi offers flexible, fee-free personal loans to qualified applicants. If you think you could benefit from a Citi® Personal Loan, apply online today.
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.
