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What happens if you are unable to pay back your loan?

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Written by Martin Lane, Managing Editor

13 February 2019

When you miss a payment on your loan, you'll be charged a fee. You may be issued with a County Court Judgement or have to declare yourself bankrupt if you continue to miss payments.

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What happens if you cannot pay back your loan?

If you do not 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 when lenders inform credit reference agencies (CRAs) about your missed payments

  • Be issued with a county court judgement (CCJ) by the lender

  • Have to declare yourself bankrupt

  • Lose the possessions you listed as security on a secured loan

What is a security on a loan?

Security is usually a valuable item you use to help you borrow money. You only need security on a secured loan.

A mortgage is an example of a secured loan. If you cannot pay back your mortgage, the lender could repossess your house.

Whatever your security is, the lender has the right to sell it to reclaim their money.

There is no security on an unsecured loan. But the lender on an unsecured loan can still add extra charges and report your missed payments to credit reference agencies.

What happens if you miss a loan payment?

You're normally charged a fee of around £25 if you miss a payment on a loan.

The exact amount depends on the type of loan you have and how much you've borrowed.

When you miss a payment, you miss the chance to reduce the capital. This means it will take you longer to repay the loan and you'll have to pay more interest overall.

If you only miss 1 payment, you may not face any further action.

What happens to your credit record when you miss loan payments?

Missing loan payments negatively impacts your credit score. Lenders are obligated to report late or missed payments to credit reference agencies (CRAs) who hold your credit file.

The different types of notices that could appear on your credit file include:

  • Default notices

  • CCJs

  • Individual Voluntary Arrangements (IVAs)

  • Bankruptcy

The amount of damage depends on how long it takes you to get back on track. Your credit record shows your repayment history for all your borrowing.

What's a default notice?

A default notice is a formal letter from your lender sent after you've missed between 3 and 6 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.

What's a CCJ?

CCJ stands for County Court Judgement. A CCJ is 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 will be added to your credit report and stay there for 6 years.

A CCJ causes significant damage to your credit record. It could make it much more expensive or prevent you from borrowing money in the future.

CCJs only apply in England, Wales and Northern Ireland. In Scotland the courts use a process called enforcing a debt by due diligence.

What are IVAs and bankruptcy?

IVA stands for Individual Voluntary Arrangement. You could use an IVA or declare yourself bankrupt if your debts you have no way to repay your debts.

You could use an IVA to fix your monthly payments at a more affordable level. Declaring yourself bankrupt would wipe out all your debts.

This may sound too good to be true, but they both have detrimental effects on your credit file. Plus, the bankruptcy application costs £680.

A bankruptcy on your credit file will make it almost impossible to get credit in the future. Your credit record dates back 6 years, so even if you're back on track financially, your history will count against you.

Get professional advice before considering either an IVA or bankruptcy from debt charities like StepChange or Citizens Advice.

Could you lose your belongings if you cannot repay a loan?

You could lose your possessions, but it largely depends on the type of loan you have:

  • For secured loans, like homeowner or logbook loans, 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.

Can a lender force someone else to pay my debt for me?

The lender cannot force anyone else to pay the debt on your behalf if it was only in your name. The responsibility is yours alone.

But the ledner could get someone else to repay the debt if you have a:

  • Guarantor loan

  • Joint loan

If you miss 1 payment on a guarantor loan, the can make your named guarantor pay for you.

If you took out a joint loan, the other person will have to repay the whole loan if you cannot. They are equally liable for the payments.

What can you do if you cannot pay back a loan?

Your individual circumstances will dictate what you can do if you cannot repay your loan. Your options include:

  • Speaking to your lender

  • Prioritising your debts

  • Consolidating your debts

Speak to your lender first

Contact your lender as soon as you think you'll miss a payment.

If you think it's only a short term issue, they may give you extra time to repay it. 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.

Prioritise your debts

Payments usually fall into 2 categories: priority and non-priority.

Priority bills include your mortgage and utilities. If you do not 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. Do not ignore them though because the lender could still get a court order if you fail to pay.

Discover more about which debts you should pay off first?

Consider debt consolidation

Debt consolidation is where you combine all your debts into one. This is to make repayments easier.

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.

Make sure consolidating your debts would reduce your payments and make them more affordable.

Discover the latest debt consolidation loan rates

What help can you get if you cannot repay your loan?

There are several free national debt charities that may be able to help you, including:

Learn what debt charities do

Should you pay for debt advice?

Though the above charities offer free advice, other companies may charge you for it when you formally take out a debt management plan.

Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.

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