Borrowers generally don’t take out a loan with a plan to default on it. However, life is full of surprises – you might lose your job, experience a medical emergency, or go through any number of unexpected events that can impact your ability to pay back your debts. In the first quarter of 2024, credit card, auto loan, and mortgage delinquencies continued to rise, with 3.2% of all outstanding debt in delinquency.
Delinquency happens when you miss a payment, while default occurs after continued missed payments. Default can hurt your credit score significantly and lead to financial distress, however, you have options to recover. Working with a credit counselor or consolidating your debt with a personal loan are some solutions that can help mitigate the damage that default can inflict.
A borrower defaults when they miss multiple payments or fail to pay back their debt entirely. However, if you simply miss one payment, your loan may not enter directly into default. Instead, your loan can be marked delinquent by your lender. The length of time it takes before your loan is considered in default depends on the terms of your loan. For example, 90 days is common for most types of unsecured loans (like personal loans and credit cards), while a federal student loan will enter default after 270 days.
Default can happen with any type of financial product, such as:
- Personal loans
- Credit cards
- Home equity loans and lines of credit (HELOCs)
- Mortgages
- Student loans
- Auto loans
Note
Refer to your loan paperwork and reach out to your lender to see what steps you can take to remedy the default.
When you default on any loan, two things can happen: The lender can report the default to the credit bureaus, and your loan can be charged off (written off as a loss) and go into collections. Other consequences might occur, depending on the type of loan, but you can expect the following for most loans:
- Credit score impact: Before default, your lender usually reports your late payments as delinquent after 30 days, which can hurt your score. But if you continue to miss your payments past the 90-day mark, your score can continue to drop significantly. Your score could drop by over 100 points (depending on the credit scoring model), and the negative marks can remain on your credit report for up to 7 years.
- Collateral repossession: If you have a secured personal loan through an asset like a car or other item of value, your asset may be seized to pay what’s owed.
- Debt collection measures: When your loan is sent to collections, you can expect a debt collector to initiate contact. These collectors may work directly with your lender, or may be with an outside agency your lender hired. Debt collectors attempt to collect the money you owe, usually contacting you by mail or by phone.
- Fees: When you default, late fees, legal fees, and collection fees can add up on top of what you already owe.
- Legal action: Your lender can take you to court, depending on the amount you owe. This could lead to legal fees, court-ordered payments, and even wage garnishment if you default on federal loans (like student loans). If this happens, a percentage of your earnings from your job can be legally withheld by your employer to pay off your debt.
Unsecured debts, such as unsecured personal loans or credit cards, don’t have an asset backing them that your lender can seize and sell to get its money back. With unsecured loans, lenders may charge off the loan, which will show up on your credit report and negatively affect your credit. Debt collectors may also sue you for what you owe.
Secured loans require collateral, which your lender can seize. Common secured loans include auto loans and mortgages. Some personal loans can also be secured. In this case, the lender can take your car or foreclose on your home and sell these items to recoup its losses. If the sale of the car or home doesn’t cover the remaining amount, you may still need to pay back the “deficiency” balance. If you fail to pay this, your lender can sue and require you to pay the balance if it’s successful in its litigation efforts.
If your loan was cosigned, keep in mind that all the consequences of default could apply to your cosigner as well. They can experience the same debt collection calls, impact to their credit score, and could also be taken to court. The consequences can also be personal and hurt your relationship with the cosigner.
Student loans are typically unsecured, but the practices for private and federal student loan defaults can differ. Many private student loans can be considered in default 90 days after the first missed payment, while federal student loans enter default after 270 days.
Private lenders can attempt to collect the debt themselves or hire debt collectors to contact you. They can also take you to court. Federal lenders can garnish your wages and withhold your tax refunds without having to sue you.
While a debt collector can be legally allowed to contact you and attempt to collect the debt you owe, you do have rights, and there are laws they must follow. Here are some things to keep in mind when speaking to a debt collector:
- No harassment: They are not allowed to harass you, including repetitive phone calls, public social media messages, or emails sent to your work email (with certain exceptions).
- No threats: They can’t falsely threaten you with arrest or claim you committed a crime.
- They can still sue: While you can ignore debt collectors or ask them to stop contacting you, they can still sue you for payment and/or report your debt to credit bureaus.
Familiarize yourself with the Fair Debt Collection Practices Act if the debt collectors contacting you are crossing the line or breaking the law. You can report them to the Consumer Financial Protection Bureau, the Federal Trade Commission, and your state’s attorney general.
- Payment history: Your payment history makes up 35% of your FICO Score, so having a history of delinquent payments and defaulted loans can seriously impact your credit. A loan default can stay on your credit report for up to 7 years.
- Impact to credit utilization: Your credit utilization ratio, which is the amount of available credit you’re using versus the amount you have available to use, can affect your score. When you default on a credit card, your card issuer may close your account, affecting your credit utilization ratio and causing it to increase. Your credit utilization is represented by “amounts owed” in your credit score, which is a factor that accounts for 30% of it.
- Credit mix: Having different types of credit accounts helps your score, so if you default on the only personal loan you have, it can negatively affect your credit mix, which makes up 10% of your FICO score.
- Length of credit history: If your account was an older one and it gets closed, it can affect the age of your credit accounts, which makes up 15% of your FICO score.
If your credit score drops because of default, it might also make borrowing more expensive, and in some cases may disqualify you outright from taking out a loan.
Important
Some landlords and employers can also look at your score to determine whether or not to rent to you or hire you.
If you’re headed for default, it might not be too late to fix things. Reach out to your lender as soon as you know you might miss a payment, or as soon as you realize you’ve missed one.
However, you can still take steps to mitigate the damage once your loan is in default.
Many lenders can work with you in challenging situations – after all, collection processes and lawsuits can be time-consuming and cost money, so lenders may often prefer to find a solution that keeps you on track. Reach out to your lender to see if it can set up a repayment plan or other option. While some factors behind your default may have been outside of your control, you can start learning good financial habits to prevent it from happening again in the future.
Debt consolidation is a term for rolling multiple loans into one loan, giving you a single payment to manage. The debt consolidation process may save you money if you can qualify for a lower monthly payment and/or a lower annual percentage rate (APR). The APR is the total cost of borrowing and includes the interest rate and upfront fees. It’s often the best way to compare loans, instead of just looking at the interest rate.
Carefully review and compare the APR, loan amount, and repayment terms with other potential loans. You can often prequalify with multiple lenders without any impact to your credit score. Prequalification is not an offer of credit, however, and your final rate may be different. Note that you may not be able to get a lower rate if your credit score has dropped due to the default.
Advertiser Disclosure
Overview
Lightstream is one of three Credible partner lenders to offer loan amounts up to $100,000, which makes it ideal for financing large expenses like home improvements or weddings. Funds are available as soon as the same day you apply, and you’ll have up to 12 years to repay certain types of loans, including home improvement loans, RV loans, and boat loans. There are no origination fees, and rates are low — Lightstream’s lowest APR beats SoFi’s advertised lowest APR by 1 percentage point. But you’ll need good credit to qualify.
Unlike most lenders, Lightstream does not let you prequalify on its site. Nor does it provide a contact phone number next to its customer service hours on its website.
Repayment terms
2 – 12 years, depending on loan purpose
Eligibility
Available in all states except RI and VT
Time to get funds
As soon as the next business day
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
Overview
Upstart has one of the lowest available APRs of Credible partner lenders and of all non-partners we reviewed, making it a good choice for well-qualified applicants. However, it’s also is one of few lenders that doesn’t have a minimum credit score requirement (if you apply on the lender’s website), which makes it an option if you have bad credit or no credit history. Upstart may charge an origination fee as high as 12%, but good-credit borrowers may not be charged one at all.
Trustpilot gives Upstart 4.9 stars, which is the highest of all lenders we reviewed.
Time to get funds
As soon as 1 to 3 business days
Loan uses
Pay off credit cards, consolidate debt, relocate, make a large purchase, and other purposes
Overview
Discover Personal Loans offers low APRs, repayment terms up to seven years, no origination fees, nationwide availability, and doesn’t require your Social Security number to prequalify on its site. You’ll need to have an annual income of at least $40,000, and a FICO score 660 or higher, to be eligible. If your credit score is fair or poor, you’ll need to go elsewhere, as Discover doesn’t allow cosigners.
Funds are available as soon as the next business day after loan approval.
Eligibility
Available in all 50 states
Time to get funds
Funds can be sent as soon as the next business day after acceptance
Loan uses
Auto repair, credit card refinancing, debt consolidation, home remodel or repair, major purchase, medical expenses, taxes, vacation, and wedding
Overview
Upgrade has a suite of features that make it a very attractive lender: competitive interest rates, discounts for direct pay and autopay, as soon as same-day funding, up to seven-year repayment terms, and nationwide availability. Plus, loans are available to fair-credit borrowers, and you don’t need to input your Social Security number to prequalify on the website. Upgrade even offers secured personal loans, which is not common among lenders.
However, Upgrade does charge an origination fee of 1.85% to 9.99%. You must have a FICO score of at least 600 and a minimum income of $25,000 annually to qualify.
Loan amount
$1,000 to $50,000 ($3,005 minimum in GA; $6,600 minimum in MA)
Loan uses
Credit card refinancing, debt consolidation, home improvement, major purchase, other
Overview
LendingClub is a solid lender for good credit borrowers and some fair credit borrowers that apply directly on its website. It’s easy to prequalify with LendingClub, especially if you’re uncomfortable providing your Social Security number, as the company doesn’t require it at the prequalification stage. (You will need to provide it if you move forward with a full application.)
While prequalification is not a guarantee that you’ll be approved for a loan, LendingClub does a better job than most other Credible partner lenders at approving applicants that have successfully prequalified. In other words, you’re less likely to have your application declined once you apply (if you’ve already prequalified). LendingClub may charge an origination fee between 3% and 8%.
Eligibility
Available in all 50 states
Loan uses
Debt consolidation, paying off credit cards
Overview
SoFi stands out for offering no-fee personal loans with competitive rates, high loan amounts, long loan terms, discounts for autopay and direct pay, and funding as soon as the same day. Plus, SoFi prioritizes convenience for existing and potential customers with features like live chat and an easy prequalification process that doesn’t require your Social Security number.
The main catch is that you need to qualify for a loan with SoFi, which can be hard to do if you don’t have good credit. You also won’t be able to apply with a cosigner, since SoFi doesn’t accept cosigners; nor does it offer secured personal loans.
Fees
Option to pay an origination fee (up to 6%) in exchange for a lower rate
Eligibility
Available in all states
Time to get funds
Typically within a few days, given approval and bank account verification, but sometimes within the same day
Loan uses
Solely for personal, family, or household uses
Overview
Best Egg is a solid lender for a wide range of borrowers and, notably, scored second for personal loan satisfaction in J.D. Power’s Consumer Lending Study. It offers competitive rates, reasonable loan terms and amounts, and personal loans for fair credit. You’ll need a FICO score of at least 600 to qualify, but the lower your score, the higher your APR may be. The APR includes the interest rate and origination fees, which range from 0.99% to 9.99% with Best Egg.
Note that if you successfully prequalify with Best Egg, you may be more likely to be approved for the loan relative to other lenders you prequalify with. Based on Credible data, borrowers who chose to apply for a loan with Best Egg were more than twice as likely to be approved (relative to most other Credible partners).
Fees
Origination fee, late fee, unsuccessful payment fee, check processing fee
Eligibility
Available in all states except DC, IA, VT, and WV
Time to get funds
As soon as 1 to 3 business days after successful verification
Loan uses
Credit card refinancing, debt consolidation, home improvement, and other purposes
Overview
Avant personal loans are a good choice for borrowers with bad credit looking for small- to moderate-sized personal loans. Loans are available up to $35,000 and you could get the money as soon as the next business day after approval. Plus, Avant is more likely than some lenders to approve the applications of borrowers who’ve prequalified with Avant. However, the lender charges an origination fee up to 9.99%, and its top-range interest rates are among the highest of the lenders we reviewed.
Fees
Origination fee, late fee, dishonored payment fee
Eligibility
Available in all states except HI, IA, MA, ME, NY, VT, and WV
Time to get funds
As soon as the next business day (if approved by 4:30 p.m. CT on a weekday)
Loan uses
Debt consolidation, emergency expense, life event, home improvement, and other purposes
Overview
It’s worth considering a personal loan through Splash if you have good credit (ideally, a FICO score above 700). The platform offers loans from a wide range of lenders, and next-day funding is available. Plus, Splash has a live chat feature so you can get real-time answers without having to wait on hold or for an email. Loans are available up to $100,000 if you apply via Splash’s website.
Rates are competitive, but borrowers with excellent credit may find lower APRs elsewhere. If you need a repayment term longer than five years, you’ll need to look elsewhere as well.
Loan amount
$5,000 – $100,000 (up to $35,000 on Credible)
Eligibility
Available in all states except VT. OH and NM net disbursed amount must be greater than $5,000. MA must be greater than $6,000
Time to get funds
Same day available, typically 1-3 days
Loan uses
Debt consolidation, home improvement, medical expenses, major purchases
Overview
Universal Credit is one of a handful of lenders that offers personal loans for bad credit. If your FICO credit score is at least 560, you may be eligible for a Universal Credit personal loan. It offers loan amounts up to $50,000, repayment terms up to seven years, and discounts for direct pay and autopay. Funds are available as soon as the next business day after loan approval.
Note that rates and fees can be relatively high — you may pay an origination fee from 5.25% to 9.99%, and APRs start at 11.69%. If you get a loan with a high interest rate, consider refinancing your personal loan at a lower rate once you’ve improved your credit score.
Eligibility
A U.S. citizen or permanent resident; not available in DC, IA, SC, WV
Time to get funds
As soon as 1 business day after acceptance
Loan uses
Debt consolidation, pay off credit cards, home improvements, unexpected expenses, home and auto repairs, weddings, and other major purchases
Overview
Happy Money has been in operation since 2009 (formerly known as Payoff). It’s an option for fair-credit borrowers (plus those with better credit), and notably has a relatively low top-end APR. In other words, you could qualify for a lower rate with Happy Money with fair credit, relative to other lenders that offer fair-credit loans. The company does charge an origination fee on some loans, up to 5%, but that’s not as high as some other lenders’ origination fees.
You should be prepared to wait a few days to get your money, as funding can take three to five days once approved. And loans aren’t available in Massachusetts or Nevada. Happy Money has an A+ rating with the BBB and is ideal for debt consolidation and credit card consolidation loans.
Eligibility
Available in all states except MA, MS, NV, and OH
Time to get funds
As soon as 2 – 5 business days after verification
Loan uses
Debt consolidation and credit card consolidation only
Overview
BHG Financial stands out for offering the largest loan amounts — up to $200,000 — of any Credible partner lenders. Simply put, if you need an unsecured personal loan over $100,000, there are very few places to look, but BHG is one. You’ll have up to 10 years to repay the loan, but you’ll need an annual income of at least $100,000 to qualify and a FICO score that’s 660 or higher. However, if you have a cosigner that meets these requirements, BHG will consider your application.
Loan amounts start at $20,000, so look elsewhere for small loans. And BHG charges a modest origination fee between 2% and 4%, depending on your financial profile. Loan funds are available within three to 14 days of loan approval. Note that you can’t prequalify with BHG.
Fees
Origination fees, late fees
Eligibility
Available in all states except Maryland and Illinois
Loan uses
Debt consolidation, baby (adoption), engagement ring financing, moving (relocation), business, home improvement, special occasion, cosmetic procedures, major purchase, taxes, credit card refinancing, medical expenses, vacation, wedding, other
Overview
Reach is an option if you have fair credit, especially if you need money fast. According to the company, 90% of Reach personal loans are funded within one day of approval.
It’s a good choice for debt consolidation and credit card refinancing, but borrowers with excellent credit may not find the lowest rates with Reach. The company also charges more fees than some of its competitors and doesn’t offer direct pay or autopay discounts. If you need a 7-year term loan, you’ll need to look elsewhere. Reach personal loans are not available in all states.
Fees
Origination Fee, $15 Late Fee, $25 NSF Fee
Eligibility
Available in all states except CO, CT, ME, NV, NH, TN, VT, WV, WY, and all U.S. Territories
Time to get funds
Funds typically deposited into your account in 1 business day13
Loan uses
Debt consolidation, credit card refinancing
Overview
OneMain Financial has multiple options for bad-credit personal loans. There is no minimum credit score required (if you apply directly with OneMain), which means you could get a loan with bad credit (FICO below 580). Plus, cosigners are allowed — a cosigner is someone (ideally, with good credit) who promises to repay the loan if you can’t, which can make it easier to qualify or lower your rate. And, secured personal loans are available. You secure a loan with collateral, which may also help you qualify or lower your rate.
Rates are higher than competitors and OneMain charges origination fees as either a flat fee up to $500, or a percentage from 1% to 10% (depending on your state of residence). Note that even if you prequalify for a personal loan with OneMain, getting approved isn’t a given.
Fees
Origination fee, unsuccessful payment fee, late fee
Eligibility
Must have photo I.D. issued by U.S. federal, state or local government
Time to get funds
As soon as 1 to 2 days after acceptance
Loan use
All except business, and education
Fox Business does not make or arrange loans.
Credit counseling services are offered by nonprofit organizations that can help you negotiate repayment plans with your lenders. These services are intended to make your payments more manageable by lowering the monthly amount and/or the APR, rather than reducing the total amount of debt that you owe. Credit counselors can also put you on a debt management plan, and can send your payments directly to your creditors. Contact the National Foundation for Credit Counseling to learn more.
Federal student loans and some private student loan lenders have forbearance programs to help borrowers going through financial hardship by postponing or reducing payments.
Federal loans provide forbearance for up to 12 months at a time if you’re struggling with making your payments due to financial difficulties, medical expenses, a change in employment, or another acceptable reason. The U.S. Department of Education also offers Fresh Start, a temporary program which helps borrowers get out of default.
Private loans can have varying forbearance policies, depending on the lender, so it may or may not be offered. If you’re able to apply for forbearance, keep making payments until your forbearance request is approved.
If the loan you’re struggling to pay is a mortgage, you may be able to qualify for a loan modification that could lower your monthly payment amount to something more manageable. Common loan modifications include reducing your interest rate, reducing your principal balance, or extending the repayment term of the loan.
Reach out to your mortgage servicer to see what modification options it offers. You can also contact the Department of Housing and Urban Development (HUD) and connect with a counselor who can help you find out if you qualify for any housing programs, and assist with budgeting or other financial issues.
Your credit score is made up of a variety of factors: For instance, the FICO scoring model considers your payment history, how much you owe, the length of your credit history, your credit mix, and your new credit when calculating your score. To improve your credit, build a history of on-time payments, contest any inaccurate information on your credit reports, keep your credit utilization ratio low, and consider diversifying the types of credit accounts you have.
You may be able to qualify for loans and credit if you default on a debt, but it can be difficult and more expensive to borrow.
A loan default can remain on your credit report for up to seven years.
There is a period of time when your loan is considered delinquent but not yet in default. During this time, you can work with your lender to avoid it. Generally, lenders want to work with you to avoid the time and expense of the collections process. You may also be able to refinance or consolidate your debt and find a more manageable repayment plan.
Meet the contributor:
Hilary Collins
Hilary Collins is a finance writer and editor. She loves taking topics that could be dry and complicated and turning them into engaging stories with actionable takeaways.
