What Happens if You Stop Paying Your Personal Loan?

It's not a good situation to be in.

It's easy to see why personal loans appeal to so many consumers. These loans allow you to borrow money for any purpose (whereas with a mortgage, for example, you can only use your loan proceeds to finance a home purchase).

As of the fourth quarter of 2022, U.S. personal loan balances were at $222 billion, according to data from TransUnion. That's up from $167 billion in personal loan balances a year prior.

Now you're no doubt aware that when you take out a personal loan, you're required to pay it back on a predetermined schedule. But what if you fall upon hard times and you're unable to pay?

Not repaying a personal loan could have really negative consequences. And unfortunately, this holds true even if you miss a single payment.

When you can't keep your end of the agreement

Any time you fail to repay a loan, whether it's a personal loan, auto loan, or home equity loan, you risk major damage to your credit score. That's because your payment history -- which speaks to how timely you are with your bills -- carries more weight when calculating your credit score than any other factor.

Now one thing you should know is that you usually won't be reported as delinquent on your personal loan until you're 30 days late with a payment. But once you miss a single payment, your credit score could take a big hit. And if you stop paying your loan altogether, your credit score could utterly plunge.

Not only that, but your lender could go after you in court in an effort to get repaid. You may, in some cases, face consequences like wage garnishment in that situation.

What to do if you can't repay your loan

You may have taken out a personal loan with every intention of paying it back, only to struggle down the line. If you're having a hard time repaying your personal loan, reach out to your lender to discuss your situation. Your lender may, depending on your circumstances, agree to let you pause your payments for a period of time or reduce your payments by extending your repayment window.

If you don't think you'll ever be able to repay your personal loan in full, another possibility is to negotiate a settlement of your debt where your lender agrees to accept a lower sum than what you owe. Often, these agreements are negotiated by attorneys or debt settlement firms. You're allowed to try to negotiate yourself, but without a professional in your corner, your chances of success may be limited.

All told, failing to repay a personal loan could have negative consequences that impact you for a long time. So before you sign a personal loan, run the numbers to make sure you can afford your monthly payments. Granted, you can't see into the future, and if things change, you might reach a point where a loan that was once affordable to you no longer is. But at the very least, make sure you're starting out with monthly payments you're capable of handling.