What happens if I can't repay my loan?

If you are worrying that you will be unable to pay back or repay your loan, don't despair. There are a number of different ways to help you find ways to repay a loan. There are some steps you can take to avoid defaulting on a loan, such as arranging a repayment holiday or taking out a debt consolidation loan.

You can get free debt advice from a debt charity to help you get back on track with your finances and sort out your debts. Simple steps can help cut your expenses and free up money to help you afford your loan repayments.

How can I find money to help repay my loan?

There is a lot of free help and advice available from debt charities such as National Debtline and StepChange debt charity, as well as Citizens Advice. They can all help you look at all your income and outgoings and help you balance your payments each month.

Cutting down on expenses and freeing up surplus money can help you start to pay off your loan debt. By keeping a weekly diary of your expenditure you can see just where your money goes. You may find ways to cut your spending or economise in order to help you repay your personal loan.

You may even find that arranging your debts carefully and paying off the most expensive debt first could free up some cash to help make your repayments. Sorting out your finances is a better way of dealing with money problems than not paying your loan instalments.

Defaulting on a repayment - what happens?

Defaulting on a loan repayments means you have missed a payment, or you have failed to repay the full amount required each month for three to six months.

Defaulting on your loan can lead to serious consequences so it's important to do your research and get help as soon as you feel that there might be a problem. Lenders would prefer you to let them know early rather than let your account fall into arrears.

What happens if I don't repay a personal loan?

The consequences of not paying loans or defaulting on your loan instalments are that the lender can begin debt collection proceedings or take court action against you. Either affects your credit record, which will mean you are less likely to be approved for other forms of credit for years to come.

For this reason, if you can't afford loan repayments you should contact your lender to ask for a payment freeze or help with repayment and seek debt advice. Lenders would prefer you to contact them as soon as you get into difficulties as it is much easier to sort out a loan default early on.

What happens if you can't repay a loan for a single instalment?

Usually if it's the first time that this has happened, you will get a letter from your loan provider warning you that you need to make up for the missed payment. You will need to find that money owed and then continue to make payments on time, or they will take action.

If you have a secured loan or a hire purchase for a car, then the loan provider may threaten to repossess your home or vehicle to recover the costs. I

f you are struggling with money problems then get in touch with a debt counselling charity who will be able to help. They will look at your finances as a whole and help you sort out your money and your debt obligations.

What can the loan provider do if I don't pay for my loan?

Lenders can be understanding if you contact them as soon as you get into difficulties and explain your circumstances. They should help you to put a plan in place to repay what you owe.

You can explain why you have money worries - perhaps you have been ill, separated from a partner, lost your job, or are recently bereaved. They are under an obligation to listen and treat you fairly.

However, if you don't get in touch and just fail to pay, you will be in default.

What happens to my loan if I am months in arrears?

A loan provider can do one of the following if you repeatedly default on a repayment:

• Pass your debt to a collection agency

• Take court action

• If it's a secured loan, they can take away the property or car tied to the debt

At first, your lender will probably write and remind you to make a payment, but if you continue to miss payment deadlines, and you are in arrears for three to six months, they may decide to take further action.

On top of this, the missed payment will show up on your credit report, which will significantly reduce your chances of being approved for credit cards and loans in the future.

You will also be in arrears, owing even more interest than before. The less you pay back, the more your debt will grow. There might also be a fee for missing a payment, so it's best to avoid missing any loan repayments in the first place.

If you can't afford your repayments, don't panic, get in touch with a debt charity as soon as you can. You can ask them to talk to your lender on your behalf.

What if I miss a loan repayment?

Speak to your loan provider and ask if they can arrange a repayment holiday for you. If they can arrange it, they will add the interest on to the next repayment date.

You can also contact one of the debt charities above who will help you work out which debts you need to pay first, and which ones can wait.

For example, it is very important to make sure you pay your utility bills and council tax, plus rent or mortgage.

After you have covered these essential bills, then you can work out which payments you need to make next. Always try to make sure that you do not fall into arrears with any payment. For example, if money is tight, make sure you at least pay the minimum payment on your credit card, rather than defaulting on your monthly payment. Make sure you pay something towards your loan if you can - you can ask your lender if they can reduce your monthly payments if you are struggling to cope.

How can I get out of debt and repay my loan?

It's important to keep calm and maintain a hierarchy of debt repayments.

• To stop you going to prison: council tax and child maintenance arrears

• To keep a roof over your head: mortgage or rent

• Protect important property: secured loans, such as for an essential car that gets you to and from work each day

After your priority payments, if you have multiple debts, calculate which one is the most expensive, and pay that one first, then work your way down. Ignore the debts that hassle you the most or the loudest, such as credit card companies. They can often be dealt with by negotiating a payment holiday.

The most expensive debt will accumulate faster and will be harder to control later on. Budget accordingly and see if there's a way you can avoid missing a repayment.

This option could save you from damaging your credit score, which is a record of all your credit and your repayments and is the information lenders use to decide whether to give you future credit.

Contacting a debt charity can help you manage your finances and avoid the potential of a downward spiral of ever increasing debt.

You could also consider taking out a debt consolidation loan or getting a 0% money transfer credit card.

I can't afford my loan payments, what should I do?

Contact your lender or a debt charity and take action straight away. Don't try to ignore the problem and do not ignore letters from your lender.

Defaulting on a loan is likely to lead to severe consequences, such as having your debt passed on to a collection agency, or you being taken to court.

If you have a loan secured with a car or your home, then it could be repossessed to recover the costs.

You will also receive a negative mark on your credit report, which will severely impact your credit score. This will also sharply increase your perceived risk when applying for other loans in future.

It is always better to sort out your loan repayments as soon as you are having difficulties, rather than waiting until you are in arrears.

Can I file for bankruptcy?

If you still can't repay your debts then you may have to file for bankruptcy, which would damage your chances of being approved for a loan for at least six years.

One option that can be used to avoid the route of bankruptcy is an IVA – an individual voluntary arrangement.

An IVA is an arrangement between the loan provider and the customer, which usually agrees to freeze the interest and help cut down the overall amount you need to repay. It will still have a negative impact on your credit score, but it has less of a stigma than bankruptcy (which is announced publicly in the Insolvency Register) and can be dealt with in private.

With an IVA you may still be able to keep your assets and find a solution that benefits the loan provider. It's a formal agreement so failing to keep up with the terms can still result in bankruptcy.

How not repaying a loan affects your credit score

Ultimately, not repaying your loan has a significant negative impact on your credit score. It shows up on your credit report when other loan providers decide to approve or reject your application.

Any missed payment will show up on your credit record and may affect how willing a lender will be to lend to you in the future. It can also affect your ability to apply for contracts such as broadband and mobile phone deals.

If you had plans to get a mortgage in future or take out a credit card, any missed repayment of a loan can reduce your options for credit and make it more difficult to get what you're looking for.

If you are considering debt consolidation to resolve your debt issues, you will get better deals if you have never a missed repayment.

Consolidating debt - how does it work and should I do it?

Debt consolidation can be an effective way to help clear your debt if you miss a repayment and all other avenues have failed (budgeting effectively, requesting a repayment holiday). Beware that debt consolidation loans may mean that you have to pay more than you would if you could just pay your debts now, so only use them if you absolutely can't pay your debts now or in the near future.

A debt consolidation loan provider will essentially pay the debts you owe and require you to pay them in one debt repayment plan. They might offer you slightly more flexible terms, but ultimately you still have to keep up with the repayment schedule.

Can I use a credit card for debt consolidation?

If you can manage to maintain a good credit score (by not missing a repayment) then you could consolidate your debt with a 0% money transfer credit card. These credit cards are usually only available to those with a very good credit score though.

You can use these credit cards to transfer cash to your bank account at a fee of around 3–5% of the amount you use. Despite the initial fees, you can then repay your debt at 0% for the length of the offer. Many of the leading 0% money transfer credit cards have interest free periods of 12 months.

If you take out a 0% money transfer credit card then you should still make a repayment plan for yourself and set up a Direct Debit from your account to ensure you stick to it. Once the 0% offer ends then you will have to pay interest again, and the rates can be quite high on these credit cards.

Who can help you if you’re struggling with debt

If you're still struggling with debt and need advice, speak to any of the following debt advice organisations and charities:

• Citizens Advice

• StepChange

• The Money Charity

• Debt Advice Foundation

• National Debtline

The sooner you ask for help the better. Even if you feel that your finances are in a mess, a free debt charity will help you sort out your money. The advisers are non-judgemental and expert in helping people get out of debt, so you can give them all the information around your debts and they will advise you on the best course of action. You do not have to pay for debt advice - the charities listed above will give you debt help for free.