Taking out a personal loan can be a smart way to cover major expenses or consolidate high-interest debt. But what if you can’t make your payments? Defaulting on a personal loan in the U.S. can lead to serious financial consequences, from credit damage to legal action.
In this blog, we’ll explain what loan default means, what happens when you stop paying, and how to avoid or recover from default.
Default occurs when a borrower fails to make required loan payments as agreed in the loan contract. Most lenders consider a loan to be in default after 90–120 days of missed payments.
There are two stages:
- Delinquency – When a payment is late but the loan is not yet considered in default.
- Default – When the lender officially declares the loan unpaid and begins collection efforts or legal action.
💡 Tip: Even one missed payment can negatively affect your credit score.
- You may be charged a late fee
- The lender may contact you to remind you to pay
- No credit report impact—yet
- Your credit report is updated with a missed payment
- Your credit score drops
- Interest and fees may continue to accrue
- Lender may restrict access to further credit
- Loan is officially in default
- Sent to collections or a third-party debt collector
- May trigger legal action
- Loan balance may become due in full
Defaulting can cause your credit score to drop by 100+ points. This makes it harder to:
- Get approved for future loans or credit cards
- Qualify for good interest rates
- Rent housing or pass employer credit checks
Your debt may be sent to a collection agency, which may:
- Call or email you frequently
- Contact your employer or relatives (within legal limits)
- File a report with the credit bureaus
🔍 Protected by the Fair Debt Collection Practices Act (FDCPA): You have the right to request verification of the debt and limit harassment.
If you continue to ignore the debt, the lender may sue you. If the court rules in their favor, they could:
- Garnish your wages
- Seize your bank accounts
- Place liens on property
- You lose access to flexible repayment terms
- Any promotions or discounts may be revoked
- The entire loan may become due immediately
No. In the U.S., you cannot be jailed for failing to repay a loan — it’s a civil matter, not criminal. However, ignoring court orders related to debt lawsuits can lead to legal penalties.
If you’re struggling to make payments, contact your lender. They may offer:
- Temporary forbearance or deferment
- Modified payment plans
- Due date changes
You may qualify for a lower-interest personal loan to consolidate and reduce your monthly payments.
Cut non-essential expenses and prioritize debt payments to stay on track.
Nonprofit credit counseling agencies can help you set up a debt management plan (DMP) and negotiate with lenders.
- Request a payoff statement or settlement offer
- Ask for a payment plan or negotiate a lump sum
- Dispute any errors on your credit report
- Rebuild your credit by making on-time payments on other accounts
Defaulting on a personal loan can feel overwhelming, but you’re not alone — and it’s not the end of your financial life. The key is to act early, stay informed, and explore all your repayment and recovery options.