Struggling with repayments?

Find out how to seek advice with our guide.

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Last updated: 23/07/2020 | Estimated Reading Time: 4 minutes

What to do if you can’t pay back a loan

Payday loans, phone contracts and mortgages are all types of loans, and you need to be wary of the varying terms and conditions for each.

But you’ve taken all precautions: you’ve calculated your finances, got cosy with the conditions and have decided a loan is right for you.  Yet life is unpredictable and circumstances change. Even with all possible foresight you could still find yourself unable to pay back a loan, and depending on the nature and size of it, that can be life changing.

So, read our handy guide on what to do in this event, so that you don’t find yourself all out of options.

In This Guide:

Speak to your lender

If you’ve consistently met your repayment terms for your loan (for example you’ve been paying your mortgage for years), then it’s likely you’ll have a good credit score. So, if you find yourself unable to make a monthly payment, the first thing you should do is tell your lender.

You may see this as dancing with the devil, but you’d be surprised: if you have a good credit score they will often be able to reschedule the payment with a small fee attached, perhaps just additional interest.

But, do be aware that defaulting on your payments comes with a catch: that information will stay on your credit record and you may find it harder to get another loan in the future.

Missing your first payment

Missing a payment and not informing your lender of your circumstances is where the trouble starts, so our best advice is to be open, honest and to keep a dialogue going. To flip it around, if you were expecting a payday but there was a delay with payroll, you’d rather know in advance than find out when your rent bounces, wouldn’t you? It’s the same mentality for lenders.  

If you miss one payment, it’s likely it’ll affect your credit score, but you can recover provided you’re transparent. How you deal with that missed payment determines how quickly that default escalates into serious trouble; if you consistently ignore it and communications, then a minor hit to your credit score becomes a wishful outcome.

What happens if I keep missing repayments?

The consequences for missing an instalment or not repaying a loan will vary depending on the type of loan it is. You may have to pay a penalty fee, which will only add to your overall debt. For many lenders, this is the first course of action.

Further missed payments will often carry further penalty fees. Seems counter-intuitive, right? But there are opportunists in all strands of loan enterprises who justify the practice of cumulative penalty fees for missed payments, creating a cycle of debt for the borrower which gets ever harder to break away from.

As a result of missed payments, you could find your belongings being repossessed, including your car or your home, depending on the loan. In some cases, missed payments can even lead to criminal charges, convictions and jail time, so be sure to keep on top of it.

What are debt collectors?

You could also find that your debt is sold onto a debt collection agent. Essentially, this is where a debt collector purchases your debt from the lender. Why would they do this? Well, the longer the debt stands, the greater it grows.

While they’ll make it their mission to reclaim the money from you, debt collectors can take all the extra dollar that’s tallying up from the fines and interest for themselves. They actively profit from your debt, so don’t give them the opportunity!

Seek advice

If you’re missing payments and your debt is building up then you should start by seeking support. There are a lot of services out there that can help such as the Citizens Advice Bureau or the Debt Advice Foundation. 

You can speak to not-for-profit organisations or charities who can both assist with setting up a manageable repayment plan as well as offering emotional support. Confiding in family and friends can also release the burden.    

In some rare cases a debt can be reduced, however these are typically with very specific types of fast-cash loans. A court recently ruled that payday loan companies, who charge upwards of 1000% APR, were thoroughly irresponsible to do so and demanded companies give back the interest paid by those who borrowed. If you’ve been subject to these terms, it’s worth seeking further advice on the process.