What happens if I can’t repay my loan?
There are steps you can take to avoid defaulting on a loan, such as taking out a debt consolidation loan or arranging a repayment holiday.
You may even find that by carefully arranging your debts and paying off the most expensive debt first, you could free up money to help you with your repayments. Defaulting on your loan can lead to very serious consequences, so it’s important to do your research before it gets out of hand.
Default of repayment – what happens?
Defaulting on a loan means you missed a payment or missed the full amount required each month for three to six months.
Usually, if this is the first time this has happened, you will receive a letter from your loan provider warning you that you need to make up the missed payment. You will need to keep making the payments on time or else they will take action.
If you have a secured loan or a hire-purchase for a car, then the lender will threaten to repossess your home or vehicle to recover the costs.
The loan provider can do any of the following if you are in default:
Send your debt to a collection agency
Take legal action
If it is a secured loan, they can take out the debt related property or car
On top of that, the missed payment will show up on your credit report, dramatically reducing your chances of being approved for credit cards and loans in the future.
You’ll also be late, with even more interest than before. The less you repay, the more your debt accumulates. There may also be a fee for missing a payment, so it’s best to avoid missing out on loan repayments in the first place.
Are you sure you should miss this refund?
It is important to stay calm and maintain a hierarchy of debt repayments. If you have more than one debt, figure out which one is the most expensive and pay that one first, then reduce it.
The more expensive debt will obviously accumulate more quickly and will be more difficult to control afterwards.
Budget accordingly and see if there is a way to avoid missing a refund.
If not, talk to your loan provider before your repayment date and ask if they can arrange a repayment holiday for you. If they can fix it, they’ll add the interest on the next repayment date. So you will always end up paying later, what if you don’t pay your loan would be much worse. This option could save you from getting an extremely negative rating on your credit score and the potentially downward spiral of ever-increasing debt.
You can also consider taking out a debt consolidation loan or getting a 0% money transfer credit card.
I can’t afford to repay my loan, what should I do?
Failure to pay on a loan can have serious consequences, such as transferring your debt to a collection agency or taking legal action.
If you have a loan secured with a car or your house, it could be repossessed to recover costs.
You will also receive a negative rating on your credit report, which will seriously affect your credit score. It will also greatly increase your perceived risk when applying for other loans in the future.
Can I declare bankruptcy?
If you still can’t pay off your debts, you may have to file for bankruptcy, which will hurt your chances of being re-approved for a loan.
One option that can be used to avoid the path of bankruptcy is an IVA – an individual voluntary arrangement.
An IVA is an agreement between the lender and the customer, which generally agrees to freeze the interest and reduce the overall amount that you have to repay. This will still have a negative impact on your credit score, but it has less stigma than bankruptcy (which is publicly announced) and can be dealt with privately.
With an IVA, you can still hold onto your assets and find a solution that benefits the loan provider. It is a formal agreement, so failure to meet the conditions can always result in bankruptcy.
How defaulting on a loan affects your credit score
Ultimately, not paying off your loan has a big negative impact on your credit score. It shows up on your credit report when other loan providers decide to approve or deny your application.
Any missed payment will demonstrate that you cannot be in debt and cannot be relied on to make full and on-time repayments.
Whether you were planning on getting a mortgage in the future or getting a credit card, any missed loan payments can really narrow down those options and make it extremely difficult to get what you are looking for.
And if you ever want to take the debt consolidation route to settle your growing debt, you will be restricting your access to better deals if you have a missed repayment.
Debt Consolidation – How Does It Work and Should It Be Done?
Debt consolidation can be an effective way to help settle your debt if you miss a repayment and all other avenues have failed (effective budgeting, requesting repayment leave). Be aware that debt consolidation loans will always mean that you will have to pay more than if you could just pay your debts now, so only use them if you absolutely cannot pay your debts now or in the near future.
A debt consolidation loan provider will basically pay off the debts you owe and ask you to pay them in one debt repayment plan. They may offer you slightly more flexible terms, but at the end of the day you still have to stick to the repayment schedule.
If you can manage to maintain a good credit score (that is, not miss a repayment), you can consolidate your debt with a 0% money transfer credit card. These credit cards are generally only available to those who have a very good credit rating.
You can use these credit cards to transfer money to your bank account for a fee of around 3% or 4% of the amount you use. Despite the initial charges, you can then pay off your debt at 0% for the duration of the offer. Most major 0% money transfer credit cards have interest-free periods of 18 months or more.
If you buy a 0% money transfer credit card, you still need to set up a repayment plan for yourself and set up a direct debit from your account to make sure you stick to it. After the 0% offer ends, 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’re still struggling with debt and need advice, talk to one of the following charities and advice: