If you've taken out a personal loan, the chances are that at the time you thought you'd have no problem meeting your loan payments each month. However, circumstances change over time, and if you're now struggling to pay back what you owe, you may be worrying about what will happen next.
The good news is that there's no need to worry as there is sure to be a solution to your problem. If you're unable to afford your loan payments, there are options open to you. You can get debt advice that will help you find ways to get back on track with your payments and get your finances back in order.
There are steps that can be taken to avoid loan payment defaults. These include liaising with your loan provider to make an arrangement for a repayment holiday on your loan repayments or taking out a consolidation loan with another provider. The best thing to do if you're struggling to pay back your personal loan is to get free help from a debt advice charity. They can assist you with your money problems and help you avoid the most serious consequences of court action being taken against you because of your loan arrears.
Defaulting on your loan repayments means that you've either missed payments or failed to pay back the entire amount required each month under the terms of your agreement with the loan provider for a period of 3 to 6 months.
Typically, if this is the only time you've missed one of your monthly payments, your lender will send you a letter telling you that you need to pay and make up for the payment that you've missed. In such cases, the best course of action is to make the payment and then continue making all your future payments on time. If you fail to do this, you will be in default, and the lender can take action against you.
If yours is a secured loan, the lender could threaten repossession of your car or home to recover their costs.
Another possibility is that you are issued with a CCJ. A CCJ (or county court judgement) is a court order which can be filed against you when you owe a lender money. A CCJ must be paid back within a period of 30 days, or the CCJ is added to your credit record and remains there for 6 years, causing major damage to your score.
The first thing to do if you miss a payment is to speak to your lender immediately. Ask them if it's possible to make an arrangement for a repayment holiday. Should they agree to this, the interest on your credit cards or loan balances will be added to your next payment date.
You may also want to speak to a debt advice service. They may be able to work with you to determine which of your debts on credit cards and personal loans need to be paid off first and which can wait. They may also be able to contact your lender on your behalf.
As an example, you need to ensure that you always keep up with your payments on your mortgage or rent, council tax, utility bills and insurance. Once these financial obligations have been met, you can then work out the payments you need to make next.
It's important to always strive to avoid falling into arrears with any of your payments. If your financial situation is difficult, you need to ensure that you're at least paying your credit card minimum payment instead of defaulting on the monthly payment. If you can afford it, you should also try to pay some money towards your loan. It's always possible to get in touch with your lender to ask if they'd be able to reduce your monthly payment if you're finding paying the full amount too difficult.
If you repeatedly default on your loan repayments, there are several things lenders could do. The consequences could be:
Passing on your debts to a collection agency.
Taking you to court.
Repossessing your car or property if yours is a secured loan.
It's unlikely that lenders will immediately jump into any of the above actions. If you miss a repayment, they will almost certainly get in touch with you first in writing and ask you to pay what you owe. However, if you carry on missing your payment due dates and your account remains in arrears for 3 to 6 months, they could decide one of the above actions is necessary to obtain the money you owe them.
The missed loan payment will also appear on your credit report, which will have a negative impact on your credit score. This will make it much harder to get approved for loans and credit cards if you apply for credit in the future.
Also, you'll owe more interest than ever. The less money you pay your lenders, the more debt accumulated. You may also be charged a fee if you miss a payment. Therefore, repaying your loan instalments on time is always the best idea.
Persistent debt on a loan can have dire financial repercussions. At the end of the day, failing to pay off your secured or unsecured loan debt won't just cost you more money in the long run due to increased interest, but it will also seriously damage your credit score. Prospective lenders will always check your credit report if you make an application for a credit card or loan, so if you decide to apply for more credit in the future, you could find that your credit score is too low to be approved.
If you miss a loan repayment or a default notice is issued on your account, it is visible for lenders when they check your credit record. If this happens, and you're unable to remove a CCJ from your credit file, it will continue to impact your ability to get approved credit in the future. For example, getting another loan may become out of the question, and you may only be offered a credit card with a very high interest rate or very low credit limit. It could even make it harder to get insurance with monthly payments or contracts like a mobile phone deal or broadband deal.
Debt consolidation loans could help you get out of debt more quickly if you're struggling to repay your loan and you have tried all of the other options - for example approaching the lender to get their agreement to a repayment holiday or budgeting more effectively.
It's important to be aware that a debt consolidation loan can end up with you having to pay back more money than you would if you could afford to pay it off now. Therefore, it should only be an option if there's no way you could afford to pay your debt off now or any time soon.
Essentially, these loans involve the provider agreeing to repay the debt you owe up front. You must then repay the total amount, plus interest, in a single debt repayment arrangement. These loans may come with slightly flexible terms. However, you must still repay on time every month or risk being taken to court. Nevertheless, these loans could be beneficial in allowing you to get your debts back on track in the long run.
If you realise that you're having financial difficulties and finding it hard to repay your loans on time, it's best that before you actually miss a repayment, you should immediately seek out some free debt advice. You could contact a debt charity or other organisations to give you the information and guidance you need to avoid the situation escalating.
You may be able to obtain a balance transfer credit card with a zero interest rate if your credit rating is still good. This will allow you to transfer all your debt onto that card so you can save money by making just one monthly repayment free of interest for the length of the offer, which could be as long as 18 months or more. You will need to pay a balance transfer fee, but you will still almost certainly save money in the long-term.
You must keep track of your debts and their repayment schedules. Work out which is costing you the most, then pay that one off first before working down the list. It's important to avoid missing payments whenever you can, as this will help protect your credit history. Debt charities and money advice organisations registered in England that are authorised and regulated by the Financial Conduct Authority can work with you to help you manage your finances and thus avoid the problems associated with increasing debt.