If you don’t pay back a personal loan then you will default on the loan. This means that the lender may sell your debt to a debt collector. The debt collector will then take over responsibility for the owed amount and begin contacting you to collect the payment. Having a loan default and move to collections will also negatively impact your credit score and could stay on your credit report for years to come.
Defaulting on a personal loan is a serious situation. You’ll likely see a drop in your credit score, you’ll be contacted by debt collectors, and it could affect your ability to get loans and good interest rates for years to come. The only way to avoid this situation is to make payments on your loans and make them on time. Paying off your loan by the agreed-upon due date will help you avoid all of this. Although we understand that sometimes this is easier said than done.
Making on-time payments for your loans and credit cards is a big deal. This is one of the biggest factors that consistently affect your credit score. Here’s how your credit score is calculated:
- 35% Payment history (whether you make payments on time)
- 30% Amounts owed (or total debt)
- 15% Length of credit history (how long you’ve used credit/loans)
- 10% New credit (new loans, credit cards, etc.)
- 10% Credit mix (how many different types of credit/loans you have)
As you can see from this breakdown, whether or not you make payments on time will have a large impact on your overall credit score. This is why it’s so important to only take out loans and credit cards that you know you can pay off by their due dates. While one missed payment may not drop your score, consistently paying late or missing payments can.
Before signing for that loan make sure you completely understand all of the costs, terms, and conditions. This can help you avoid a lot of financial heartache in the future.