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What happens if you can't pay back a personal loan?

If you can’t afford to pay your personal loan, there are things you can do that could help.

21 November 2022Helen Tippell 5 min read
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If you need debt advice, you can speak to charities like StepChange, National Debtline and Citizens Advice.

Generally, it takes about 30 days for a missed payment to show on your credit report. If you manage to make the full payment quickly (and before that 30-day period ends) your lender might not report it to the credit reference agency (like Equifax).

Your credit score could go down

If the missed payment is added to your credit report, you could see a drop in your credit score. There are ways you can improve your credit score if this happens.

You might have to pay a late fee

Some lenders will charge a late fee for a missed payment.

You might default on your loan

If you’re unable to make multiple payments in a row, you might default on your loan. That means the lender could start taking steps to recover the money from you – they might appoint a debt collection agency or begin legal action.

If you’re having difficulty paying, there are things you can do straight away to help.

Contact your lender

Let your lender know you’ve noticed a missed payment on your loan. Contacting their customer service team should give you the opportunity to agree the steps you’ll take to make up the payment.

You can usually find their contact information by scrolling to the bottom of their website and clicking on something like ‘Contact us’.

If you think you might miss a payment, contact your lender as soon as possible to talk about your options.

Make the payment as soon as you can

If you’re able to make the payment, it’s a good idea to do it sooner rather than later.

The lender might charge you a missed payment fee – but they should contact you to let you know.

Set up automatic payments

To help you take control of your finances, it’s a good idea to set up reminders that tell you when a payment is due and to set up automatic payments. That way, you can feel more at ease knowing your payments are going through in the background.

Who can help if you’re struggling with debt?

If you’re worried about repaying your loan, you can seek advice from various charities dedicated to supporting people experiencing financial difficulties.  You can go to charities like National Debtline and StepChange and ask one of their experts for guidance. You can also reach out to Citizens Advice.

Late and missed payments, once reported, can stay on your credit report for six years. If you want to apply for credit again (like another loan or a credit card), it’s a good idea to wait for your credit score to improve. That’s because a better score can mean better offers.

Next step: Get your free credit score today.

If you miss multiple payments in a row, you might see these notices on your report.

Default notice

Usually, if you miss between three and six loan payments, your lender will send you a formal letter. The letter should explain the terms you’ve broken and the next steps. They’ll let the credit reference agency (CRA) know and a default notice will appear on your credit report.

County court judgements (CCJs)

A CCJ is a county court judgement. If your lender chooses to take legal action to recover the money, you could get a CCJ. These tend to have a big impact on your credit score and they stay on your credit report for about six years – they can impact your ability to get credit in the future.

Individual Voluntary Arrangements (IVAs)

An IVA is a formal agreement between you and your lender, where you agree to pay back your debt over an agreed period of time. It means the lenders should freeze your interest and shouldn’t chase you for your debt. You usually have to pay an upfront fee to set up an IVA and you’ll have to let the IVA provider know if there’s a change in your circumstances.

Bankruptcy

You might be able to declare bankruptcy if you can’t pay off your debt, and the amount you owe is more than the things you own. Bankruptcy usually lasts 12 months and there’s a cost of £680 you’ll need to pay before you can declare.

It’s a good idea to understand the ins and outs of these notices so you can be prepared. Citizen’s Advice is a good place to start for more details about how each of these can affect you.

If you’ve taken out a secured loan, you risk losing whatever you’ve put down as security – like your car or home.

With an unsecured personal loan, you risk losing your belongings if the lender appoints a debt collection agency or takes legal action.

If you’ve missed a payment or think you might, you should get in touch with your lender straight away. They should take you through your options and refer you for independent debt advice if needed.

Debt can feel overwhelming, which is why seeking help from specialists is a good first step.

They might help you build a personal budget that helps you manage your outgoings, or help you understand which debt is a priority.

Consolidating your debt means taking out another loan or credit card and using the money to pay off what you owe. Then, your repayments will be in one, more manageable place. There's a couple of different options when it comes to debt consolidation.

A debt consolidation loan

Because the offers you’ll see for credit will be affected by your credit score and history, the loan offers you see might have high interest rates. You should compare your options before applying for a new loan – look out for interest rates, additional fees and any short-term promotional offers.

A debt consolidation credit card

If you have other debts – like on a credit card – you could look into switching to a credit card that offers low or no interest rates. Some cards, like a 0% balance transfer card, let you transfer your outstanding balance and pay it off steadily. The interest-free period could be for a few months, too.

You might be able to declare bankruptcy if you can’t pay off your debt, and the amount you owe is more than the things you own. Take a look at bankruptcy advice on the UK government website.

If you have a guarantor loan, and you’re unable to make repayments, your debt transfers to them. They’ll become responsible for the loan including all future repayments and the debt it accrued. Your credit report will still be impacted and detail any default notices, for example, but the guarantor will have to make the repayments.

A guarantor should only have to pay your loan as a last resort so it’s important to contact your lender straight away.

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Written by Helen Tippell

Digital Copywriter

Helen's our resident Digital Copywriter. She makes personal finance easier to understand so you can be ClearScore sure about your choices.