Will You Lose Your Home if You Stop Paying Your Personal Loan?

Personal loans are unsecured, but there are still consequences to not paying one back.

Personal loans have become an increasingly popular way to borrow money. As of 2021's fourth quarter, U.S. personal loan balances sat at $167 billion, according to TransUnion. By the fourth quarter of 2022, that figure had grown to $222 billion.

A big reason personal loans are so often used to borrow is that they're very flexible. When you take out a personal loan, you can use the proceeds for any purpose. And you also don't need to put up a specific asset as collateral when you take out a personal loan.

Rather, personal loans are unsecured. This means lenders don't have the same recourse in the event of non-payment as lenders that give out secured loans, like mortgage lenders.

But still, the consequences of not repaying a personal loan can be pretty severe. And while you generally won't lose your home if you stop paying a personal loan, you might run into difficulties with selling yours.

When you don't repay your debt

When you stop making payments on a personal loan, your lender can, eventually, take you to court to try to get repaid. If a judgment is entered against you, your lender may be able to garnish your wages to get repaid. Your lender might also be allowed to put a lien on your home.

A lien is basically a legal claim to your property. This doesn't mean that your lender can take your home from you. Rather, what will generally happen is that if there's a lien on your property and you try to sell it, you won't be allowed to until your debt is paid off.

Don't ignore a personal loan you can't repay

Even if you don't reach the point of having your wages garnished or having a lien placed on your home for not repaying your personal loan, failing to make payments could mean having your credit score take a massive hit. Once that happens, it could become very difficult to get approved for another loan.

So, let's say your credit score plunges and a few months later, your car dies and you need to buy a new one. In that scenario, you might really struggle to get approved for an auto loan.

If you've fallen on hard times or your circumstances have changed so that you can no longer pay your personal loan, your first move should be to reach out to your lender and discuss the matter at hand. Your lender's goal is to get repaid, and they might be willing to work with you to make that happen in time. Your lender might, for example, allow you to reduce your monthly loan payments and repay your balance over a longer time frame.

You might also, in some cases, be able to get your lender to agree to a lower payoff amount than what you actually owe. If your ability to hold down a job is compromised, for example, due to illness or injury, that might prompt your lender to agree to a settlement.

Either way, it's important to talk things through with your lender the moment you realize you can't make a personal loan payment. Even though you may not be at risk of losing your home for not paying, there's still a host of negative consequences you might face.