Sometimes, there’s a simple solution to paying back your loan, such as selling something you own. For example, if you can’t afford your car loan repayments, selling the car is a good move. You could then switch to a cheaper model or use public transport for a while.
But it’s not always as easy as this and you could find yourself in trouble with your loan provider.
If you don’t pay back your bank loan as per the agreed terms, you may:
be charged a fee, plus interest, on any missed payments
damage your credit record, as lenders will inform credit reference agencies (CRAs) about your missed payments
be issued with a county court judgment (CCJ) by the lender
have to declare yourself bankrupt
lose the possessions you listed as security on a secured loan, such as your home.
Security is usually a valuable item you use to help you borrow money. You’ll only need security if you’re taking out a secured loan.
A mortgage is an example of a secured loan. If you can’t pay back your mortgage, the lender could repossess your house. The house is the security.
Whatever your security is, the lender has the right to sell it to reclaim their money if you don’t repay the loan as agreed.
There’s no security on an unsecured loan. But the lender on an unsecured loan can still add extra charges and interest and report your missed payments to credit reference agencies. So you’ll still need to do everything you can to make the repayments.
You're normally charged a fee of around £25 if you miss a payment on a loan. But the exact amount you’ll have to pay depends on the type of loan you have, the provider, and how much you've borrowed.
When you miss a payment, you miss your monthly chance to reduce the capital. This means it’ll take you longer to repay the loan and you'll have to pay more interest overall.
If you only miss one payment, you may not face any further action. It all depends on the terms and who your lender is. Contact your provider and explain the situation, if it’s a one-off it might not act on the missed payment.
Missing loan payments negatively impact your credit score. Lenders have to report late or missed payments to CRAs, who hold your credit file. This can affect your ability to borrow in the future. Potential lenders will be less willing to loan you money if you’ve missed payments in the past.
The amount of damage done by missing a payment depends on how long it takes you to get back on track. Your credit record shows your repayment history for all your borrowing.
The different types of notices that could appear on your credit file include:
Individual Voluntary Arrangements (IVAs)
A default notice is a formal letter from your lender. It’s sent after you've missed between three and six loan payments. It sets out the details of your loan, what terms you've broken and what you need to do next.
A default notice is added to your credit report. This can make it harder to borrow money in the future.
A CCJ stands for county court judgment. It’s a type of court order that a lender can file against you if you owe money.
Unless you pay back your CCJ within 30 days, it’ll be added to your credit report and will stay there for six years.
A CCJ causes significant damage to your credit record. It could make it much more expensive to borrow money, or even prevent you from borrowing money in the future.
CCJs only apply in England, Wales and Northern Ireland. In Scotland the courts use a different process called enforcing a debt by due diligence.
An IVA is an Individual Voluntary Arrangement. You could use an IVA or declare yourself bankrupt if you have no way to repay your debts. They both work in different ways and it’s a good idea to understand exactly how each works, and how much it will cost you, before you make a decision.
An IVA is where you and your loan provider (or providers) come to a formal agreement to freeze interest and help reduce the amount owed. It can be a helpful way to fix your monthly payments at a more affordable level. You'll usually pay around £400 to set one up, although prices vary. It does affect your credit score but not as badly or publicly as bankruptcy. However, if you then default on your IVA it’s likely to lead to bankruptcy.
Declaring yourself bankrupt would wipe out all your debts. This may sound too good to be true, but it has hugely detrimental effects on your credit file.
A bankruptcy on your credit file will make it almost impossible to get credit in the future. Your credit record dates back six years. So even if you're back on track financially, your history will count against you. Plus, a bankruptcy application costs £680. Although you can pay in instalments, it will all need to be paid before you submit your application. It is also announced publicly so may have a stigma attached to it.
You could lose your possessions, but it largely depends on the type of loan you have.
For secured loans, like a mortgage, the lender can take and sell your possessions. If you've used your home as security, the lender will need a court order to repossess it
If you have an unsecured loan, it's harder for the lender to force you to sell your possessions. But they could apply for a charging order and get the loan added to your property through the courts. This would always be a last resort.
The lender can’t force anyone else to pay the debt on your behalf if it was only in your name.
But the lender could force someone else to repay the debt if you have one of the following:
If you miss even just one payment on a guarantor loan, the lender can make your named guarantor pay the rest of the debt for you.
If you took out a joint loan, the other person will have to repay the whole loan if you can’t because they’re equally liable for the payments. This can be the case even if it was with an ex-partner who you’re no longer with and it can be hard to take your name off a loan like this.
Your individual circumstances will dictate what you can do if you can’t repay your loan.
Your options include:
Contact your lender as soon as you think you’re likely to miss a payment. They’ll often take a better view if you get in touch before it happens, than if you just miss the payment without mentioning it. This could mean less stress and fewer charges.
If you think it's only a short-term issue, such as cash flow, they may give you extra time to repay your debt. They could also delay reporting the missed payment to credit reference agencies.
Let them know about potential longer term problems too. You could ask for some breathing space while you get independent help to work out how to best handle your debts.
If you're unsure what to say, you could use National Debtline's template letter.
Payments usually fall into two categories: priority and non-priority.
Priority bills include your mortgage and utilities. If you don’t pay these, you could lose your house or have your heating turned off.
Non-priority debts have less serious consequences. These include unsecured loans or credit cards. Don’t ignore them though, because the lender could still get a court order if you fail to pay.
Debt consolidation is where you combine all your debts into one. It can make repayments easier if it’s all being paid to the same lender on the same date each month.
Consolidating your debts can make your borrowing more affordable and save you money on interest. But it's not always the best solution. For example, the overall interest rate could be higher, so your debt could end up costing you more. The only way it can help you to clear your debts at a faster rate is if you can take out a consolidation loan at a lower interest rate. Remember to calculate the time it will take to clear the loan as well, if it’s a lot longer than your previous debts, you’ll end up paying out more overall.
Check that consolidating your debts would reduce your payments and make them more affordable.
There are several free national debt charities that may be able to help you, including:
If you’re in financial difficulty, it’s important to create a budget and commit to sticking to it. Creating a budget will leave you able to work out how much you can afford in loan repayments. This is helpful if you’re going to discuss your situation with your lender.
To create a budget you’ll need to look at:
where you can cut back (such as gym membership, subscriptions, or meals out).
Remember you need to review a budget regularly, ideally every six months or when your finances change.