If you’re having trouble paying off a loan, it’s important to know what steps you can take to keep your debt from spiraling out of control.
Here, we explain what could happen if you fail to keep up with your repayments, as well as how to start getting your finances back on track.
What happens if I miss a loan repayment?
If you miss a monthly loan repayment, you will usually receive a letter from your lender asking you to make up for the missed payment the following month. You will also be charged a missed payment fee of around £ 25.
As long as you make the payment and don’t miss any future repayments, your lender is unlikely to take further action. However, if you are unable to make the payment or if you miss multiple loan payments, the consequences can be more serious.
Missing payments or failure to repay the full amount required each month for three to six months is called default.
If this happens, your lender will send you an official letter known as a “default notification”. This will outline the details of your loan, the terms you have broken, and the steps to take.
How will missing payments affect my credit report?
Your missed payments and your default notice will be recorded on your credit report which could affect your credit score and make it more difficult to access financial products in the future.
If you’re still having trouble paying off your loan, your lender could transfer your debt to a collection agency. Your debt is “sold” to the agency, which will then take action to get its money, plus a profit, back from you.
You may find that your lender or debt collector files a County Court Judgment (CCJ) against you.
This is a type of court order in England, Wales and Northern Ireland. In Scotland, if your lender takes legal action, they will ask for a decision / decree.
You will receive your judgment in the mail, and it will explain:
- how much you owe
- how to pay (in full or in several installments)
- the payment deadline
- who to pay.
You will have one month to repay the amount owed, but if you fail to do so, the judgment will be added to your credit report and will remain there for six years.
What happens if I can’t repay my loan?
If you have no way to pay off your debt, you may need to use an Individual Voluntary Arrangement (IVA). An IVA is a formal and legally binding agreement between you and your creditors to repay your debts over a set period of time.
Otherwise, you may have to file for bankruptcy, but this can have serious consequences and should therefore be carefully considered.
What if i have a secured loan?
If your loan is secured against your home or car and you continually miss payments, you may have to sell your property or vehicle to pay off what you owe. Note, however, that this is usually only a last resort, so it’s important to speak to your lender and seek advice as soon as possible.
Get help before your fault
If you think you might miss a loan repayment, speak to your lender immediately and explain the situation to them. Your lender may be able to make an agreement with you to help you pay off your debt before taking further action.
For example, your lender may:
- give you more time to pay off your debt
- reduce your monthly payments
- reduce the amount of interest you owe
- delay reporting the missed payment (s) to credit reference agencies.
Your lender may also suggest that you consolidate your debt, which will allow you to consolidate all of your debts into one monthly payment with one lender.
One way to do this is to remove a debt consolidation loan. Not only can this make managing your finances a lot easier, but if you are able to reduce the amount of interest you pay, you will also save money.
Priority vs. non-priority debt
While it’s important to keep pace with your loan repayment, certain payments, called senior debt, must take priority over your loan repayment. These include:
- housing tax
- other taxes
- utility bills
- TV license
- mortgage or rent
Failure to pay your housing tax, fines, or TV license could result in jail time, failure to pay your utility bills could result in your power supply being disconnected and failure to- meeting mortgage or rent payments could knock your roof off your head.
In short, it is therefore essential that you make these payments before spending money on other debts, including your loan repayments.
A good way to help you manage this is to establish a monthly budget, assess where you can make cuts, and set aside a certain amount for each payment, prioritizing your top debt.
Where to get help
If you’re struggling with debt, it’s important not to put your head in the sand but to seek advice as early as possible. There are a number of charities that offer free advice and support and can help create manageable debt repayment plans. These include:
Do not hesitate to contact one of these free charities if you are having financial difficulties.
Beware of debt counselors who charge for their services – they often pay to appear at the top of internet search pages, but charities lower in search results offer great freelance services at no cost to you.