Here's What Happens When You Don't Repay a Personal Loan

Many consumers turn to personal loans when they need to borrow money. Personal loans can be a far more affordable way to borrow than charging expenses on a credit card and carrying a balance forward. And if you have a good credit score, you might qualify for a fairly competitive interest rate on a personal loan.

But when you sign a personal loan, you commit to making payments on a predetermined basis. And if you don't repay your personal loan on schedule, the consequences could be quite unfortunate.

You could face costly fees

Some lenders impose fees for failing to repay a personal loan on time. And those fees might apply even if you're just a day late, warns Experian. Not only that, but late payment fees on a personal loan can range from as little as $25 to as much as 5% of your loan balance. Ouch. Make sure to set reminders for yourself so you're not late.

Your credit score could take a massive hit

Your lender generally won't report a late or missed payment on a personal loan until you're behind by 30 days or more. But once you reach that point, your lender might be quick to report your lateness to the credit bureaus. And a single late payment on your credit report could drag your score down quite a lot.

The exact extent of that damage will hinge on how high your credit score was to begin with. Believe it or not, a single late payment has the potential to cause more damage to a strong credit score than a weaker one. 

But Experian warns that a late payment could stay on your credit report for up to seven years. During that time, you might have a harder time getting to borrow money when you need to.

And even if you are approved to take out another loan while that late payment is still on your credit report, you could get stuck with a higher interest rate. That could, in turn, make you more likely to fall behind on future loan payments, too.

You could have your wages garnished

If you fail to make payments on an auto loan, you risk having your vehicle repossessed. Personal loans are unsecured, so usually, a lender can't go after a specific asset of yours to get repaid. However, your lender could either sue you in court to get repaid, or turn your delinquent debt over to a collection agency that sues you in court. 

Either way, if a judgment is entered against you, your creditor may have the right to garnish some of your wages to get repaid. That could make it difficult to keep up with your expenses. 

Be careful when signing a personal loan

It's pretty clear that failing to repay a personal loan could have very serious consequences. So before you sign one of these loans, run the numbers to make absolutely sure you can afford your monthly payments. You don't want to end up in a situation where you're faced with costly fees, credit score damage, or a chunk of your paycheck being taken away.