Just like with other credit products, defaulting on a personal loan can have serious consequences. These include a drop in your credit score, limited ability to access credit in the future and facing legal action. That said, there are ways to avoid default and even get out of it if you’re already down that path.

What does it mean to be in default on a personal loan?

Defaulting on a personal loan means you’ve failed to make the required payment by the established due date. But missing a payment by a few days won’t immediately affect your credit. Most likely, you’ll only have to pay a late fee. If you’re more than 30 days late, however, lenders may report this to credit bureaus — in which case, you’ll see your credit score drop by a few points.

If you’re more than 90 days late, the lender could get your debt charged off, meaning that it has written it as a loss and sell the account to a collection agency. If that happens, you could face legal action and get some of your property seized in order to repay your debt.

What happens after a personal loan is in default?

The consequences of defaulting on a personal loan vary depending on how long you’ve been delinquent.

  • Damage to your credit: Defaulting on a loan can result in negative marks on your credit report and score. This, in turn, will drag down your score for up to seven years.
  • Limited access to credit: Some lenders may decline any future credit applications on your behalf, as you will be seen as a borrower with a higher risk of default.
  • Higher interest rates: A significant drop in your credit score means that you won’t be able to secure the best terms and interest rates when you apply for other credit products, making your debt more expensive..
  • Legal action: Depending on the type of loan and your state’s laws, what happens when you default on a loan could include debt collection, asset seizure, wage garnishment and a lawsuit.

How to avoid defaulting on a personal loan

Even if you’ve been paying all your bills like clockwork, there are certain circumstances that are out of your control and that could put you at risk of defaulting on your loan. But taking these steps could save you from defaulting on your loan, even in the worst of cases.

Make sure your loan terms work for you

Before you sign for a personal loan, be sure that you are comfortable with your monthly bill, even if you were to experience a reduction of income. A loan that’s too short can result in a higher monthly payment, which may be an issue if you find yourself in a tight financial spot. But getting a loan term that’s too long can cause you to pay excess interest.

Only borrow what you can afford

Budget and crunch the numbers ahead of taking out your loan, as this will give you an idea of how much you need. Although you may qualify for a higher amount, only take what you need and can afford to avoid future financial woes.

Set up automatic payments

If you’re not the best at keeping track of your due dates, consider enrolling in automatic payments, as this will ensure that your payments always get through on time. Additionally, some lenders give an interest rate discount for enrolling in autopay, making your loan less expensive.

Contact your lender

Lastly, if you feel like you may have trouble making payments, contact your lender. In most cases, lenders are able to provide some sort of temporary solution to help you out until your situation improves.

Some of the options that may be available include deferment or forbearance, a modification of your loan terms or emergency assistance.

How to get out of default on a personal loan

If you’ve already defaulted on your loan, try exploring these alternatives to help you get back on your feet.

  • Talk to the lender: If you’ve only missed a single payment, contact your lender and ask what options they have available to get your account current again or seek a temporary fix.
  • Consolidation: If your credit is otherwise solid, or you can get a co-signer, you may be able to pay off the default loan by combining it with other open accounts using a debt consolidation loan.
  • Tap into equity: You may be able to borrow against your home or retirement plan to get current on your loan. However, doing this could also come with consequences — such as facing foreclosure if you aren’t able to pay your HELOC or cutting yourself short from retirement savings.
  • Seek a credit counselor: A credit counselor may be able to help you outline a plan for paying off the amount due and avoiding similar issues in the future through budgeting and better managing debts. Some organizations, such as the National Foundation for Credit Counseling, may even offer these services for free.