Personal Loans Are Unsecured. Will There Be Any Consequences if You Become Delinquent?

There's a reason so many people turn to personal loans when they need to borrow money. Personal loans are unsecured, so they're not tied to a particular asset. As such, you can use the proceeds of a personal loan for any purpose. By contrast, when you take out a mortgage, you can only use your loan to finance the purchase of a home.

During the third quarter of 2023, U.S. personal loan balances reached $241 billion, up almost 15% from a year prior, says TransUnion. So if you borrowed via a personal loan over the past year, you were clearly in pretty good company.

But if you're now struggling to keep up with your personal loan payments, it's important to reach out to your lender right away. Defaulting on a personal loan could put you in serious hot water despite that loan not being secured.

Defaulting on personal loans still has negative consequences

If you fall far enough behind on your mortgage payments, you could eventually lose your home to foreclosure. And if you fail to make too many car loan payments, your vehicle could get repossessed.

Personal loans work differently. Because they're not secured by a specific asset, you don't necessarily risk losing a specific asset when you fall behind on your payments. But that doesn't mean you won't get hurt financially.

Any time you fail to pay a loan on schedule, it serves as a black mark on your credit report. That could drag down your credit score, making it hard (or even impossible) to borrow money the next time you need to.

It can take many years to recover from extensive credit score damage, too. So you may have to put off different goals, like buying a house, until that happens.

You should also know that if you default on a personal loan, your lender has the right to take you to court to get repaid. If a judgment is entered against you, you could risk having your wages garnished to some degree with a portion of your earnings going to your lender.

Plus, your lender may be able to put a lien on an asset you own, like a home. This doesn't automatically mean it can or will force the sale of your home. But it could mean that if you decide to sell independently, your lender will have a claim to your sale proceeds to get repaid.

Don't let your personal loan payments fall by the wayside

Clearly, failing to repay a personal loan can be a very bad thing. To avoid negative financial consequences (or at least minimize the blow), get in touch with your lender once you start having trouble keeping up with your loan payments. Your lender may be willing to work with you to get through that situation.

For example, let's say you're struggling with payments due to having lost your job. If you show your lender proof of that hardship, it may agree to let you pause your payments for a period. Your lender may also agree to a restructured repayment plan that's easier for you to keep up with.

Falling behind on a personal loan is something you really don't want to do. If that seems inevitable, the sooner you communicate your struggles to your lender, the less likely you'll be to suffer the harshest of repercussions.