What Happens if I Default on a Loan?

When you take out a loan, it’s important to make sure that you’re able to make your repayments on time and in full each month.
Sometimes life doesn’t go according to plan, and our financial situation changes.
Are you worried about defaulting on a loan? We understand that finding yourself in a position where you can’t afford to repay your loan can be scary.

The information in this article is meant as a general guide. It is not advice and should not be taken as advice. If you’d like to talk to someone about debt concerns, please consider speaking to a debt advisor or reaching out to any of the following organisations for free, impartial advice: StepChange, MoneyHelper, Citizens Advice, and National Debtline.

What to do if you can’t afford to repay your loan

If you’re worried that you’re not going to be able to afford to make an upcoming loan repayment, contact your lender as soon as you can. This can feel daunting, but it’s an important step to take.

Lenders understand that people’s circumstances change. After listening to your situation, they’ll talk to you about the options you have.

Before you contact your lender, it might be a good idea to make a note of your monthly income and essential outgoings. This will help the lender better understand your situation.

While every lender is different, this could include:

• A temporary repayment holiday, where your repayments are paused for a while.
• Temporarily reduced repayments, where you repay a smaller amount each month for a while.
• Freezing your interest for a fixed period. This means you’ll only make your monthly loan repayment without the interest you’d normally be charged.

What happens if I miss a loan repayment?

• Your lender may charge you a fee
  Some lenders charge a fee for late or missed repayments.


• Your credit score will be hurt
  Your lender will report late and missed repayments to the credit reference agencies (CRAs), and your credit score will drop.


• It could affect any future credit applications
  Having a missed or late repayment on your credit report could affect your chances of approval if you need to apply for credit in the future. If you are approved to borrow again, you could be offered a higher interest rate as a result.


• Your lender could send you a default notice
  If you’ve missed multiple repayments and haven’t come to an agreement with your lender, they may send you a default notice. This will explain your repayment options, and you should be given at least 2 weeks’ notice to pay the money you owe.


• Your lender could take legal action
  Your lender must give you the opportunity to pay back the money you owe before they take this step.
  If you still don’t repay the money you owe after receiving the default notice, your lender could take legal action against you or arrange for a debt collection agency to step in. Legal action could result in a county court judgement (CCJ). Find out more about CCJs in our guide.

Defaulting on a loan repayment: what is a loan default?

Defaulting on a loan means that you haven’t kept to your repayment schedule and you’ve missed 3-6 months’ payments. What happens if you default on a loan? What happens next will depend on the type of loan you have and your lender.

Defaulting on a loan: secured loan v unsecured loan

A secured loan is when you borrow money using something you own as a guarantee. This is usually your home and is called ‘collateral’. If you default on your repayments, the lender has the right to sell your home to recover the money they’ve lost.

We’ve outlined what can happen if you default on a secured or an unsecured loan.

	Secured Loan	Unsecured Loan
Can the lender take your asset?	Yes, they can take and sell your asset if you don’t repay	No, no asset is attached to the loan
Does it affect your credit score?	Yes	Yes
Are there late or missed repayment fees?	Possibly, depending on the lender.	Possibly, depending on the lender.

How can I reduce the risk of defaulting on a loan?

• Think carefully before you apply for a loan
  A loan is a serious financial commitment, and you should always do thorough research before you apply for one. You should never apply to borrow more money than you need or can afford to repay.


• Work out your monthly budget
  Create a budget to make sure your essential costs, such as housing, credit commitments, bills, and food, are covered.


• Set up a Direct Debit
  If you set up a Direct Debit with your lender, they’ll automatically take your repayments from your bank account each month. A Direct Debit could be helpful if you’re worried that you might forget to make your repayments yourself.


• Talk to your lender
  As we’ve talked about, if you’re struggling with your repayments, you should contact your lender as soon as you can. The sooner they’re aware of your situation, the sooner they can work with you.

Default on my credit file: how long will a missed payment stay on my credit report?

A late or missed loan repayment will stay on your credit file for up to six years.
This will harm your credit score. The impact on your score may reduce over time if you consistently keep up with your repayments.

Where to get financial advice

If you need money and/or debt support, please know that you can reach out to any of the following UK charities and organisations for free, confidential advice:

• StepChange
• MoneyHelper
• Citizens Advice
• National Debtline.