What Happens If You Don’t Pay an Installment Loan?

When you take out a loan, you also enter into a contract. Not paying your bills as agreed may have a variety of consequences, including legal ones. Find out more about missing installment loan payments and what might happen below, and get some advice on steps to take if a loan is causing too much financial strain.

What Happens When You Default on an Installment Loan?

If you miss a loan payment, you’ll likely face some penalty, and the later you are with your loan payment, the more severe the consequences. The exact action taken when a payment is missed differs based on the lender’s policies and your agreement with them.

The main thing you should try to avoid is delinquency. Being delinquent on a loan means you’re not current with payments, which could lead to default. You can be delinquent on a loan as soon as you miss a payment. Here are some common consequences for various levels of delinquency with installment loans.

What Happens if You Miss a Payment on an Installment Loan?

If you’re only a few days late with a loan payment, you may be covered by a grace period. For example, if your loan has a 10-day grace period, your payments aren’t technically considered late if you make them within the 10-day period following the due date. The length and stipulations of a grace period depend on your lender and loan agreement, so make sure you read all the fine print. Some loans or accounts may not have one, and grace periods are only meant to be a safety net for the rare times you forget or can’t make a payment. They’re not meant to permanently move your due date forward.

If you miss the grace period — or don’t have one — your loan payment will be considered late. Here are some things that might happen:

• You may get a notification from your lender that your payment is late and that you should take action to remedy the issue.
• Your lender may report the payment as late on your credit report. On-time payments are a huge part of your credit score — they’re the top factor for calculating your score. A single late payment may lower your score and hurt your credit history.
• You might be charged late fees or other finance fees or have your interest rate raised as a result of the late payment. This increases the total cost of your debt.

Missing Multiple Loan Payments

If you miss two or more payments in a row, the consequences may increase. You may be charged more late fees or finance fees. The lender may also report the additional lateness of payments to the credit bureaus. Being 60 or 90 days late or more is typically worse for your credit than a single missed payment.

At some point, the lender may consider you to be in default on your loan. This typically occurs when you’ve missed your payments for an extended period of time. It depends on the lender, but default commonly occurs after 90 days or more of missed payments.

What Can a Loan Company Do if You Don’t Pay?

If you go into default, the lender may send your account to collections. Some lenders begin with an internal collections process, which typically means the lender will become more aggressive in its pursuit of the outstanding debt. They might send you notices about the amount due and let you know that failure to pay within a certain amount of time will result in further collections activity.

Some lenders pass defaulted accounts to outside collection companies. These companies may work to collect the debt from you, including filing a lawsuit against you and attempting to get a judgment. If they’re successful, they may be able to garnish your wages or put liens on your accounts.

It’s important to note that you, as the borrower, do have rights throughout this process, as laid out by the Fair Debt Collection Practices Act. If you’re dealing with debt collectors, make sure you know your rights so you can protect yourself.

What Can Cause You to Miss a Loan Payment?

Many people who miss loan payments do so despite good intentions. Missing payments is something most people go through in life, and it doesn’t necessarily mean you’re bad with money. Sometimes, life creates unforeseen circumstances. Some common reasons for missing loan payments can include:

• Forgetting to handle the task because of other obligations and distractions
• Not realizing that the loan is due because you misunderstood the paperwork or loan requirements
• Struggling with finances and being temporarily unable to make the loan payments

While these are all understandable issues or mistakes, missing your payments still comes with consequences. So, it’s best to take action to avoid missing loan payments by being proactive in cutting down the financial strain of payments.

Tips for Making Your Installment Payments on Time

Planning and staying organized can help ensure you’re able to stick to your payment plan. For example, one of the best ways to ensure you can make your loan payments is by understanding how much you can afford to borrow. Look realistically at your income, how much you pay in other bills and what you need to cover necessities, such as groceries and fuel. If you don’t have enough left over to cover a loan payment, you may need to wait until you can cut your expenses, increase your income or get a better interest rate.

If you decide you can afford an installment loan, take some organizational steps to ensure you can and will remember to make regular payments. Create a written budget and stick to it to help manage your money every month. Put payment reminders on a calendar or planner, or use the calendar or reminder apps on your smartphone to ensure you don’t forget to pay the bill.

Many lenders may offer auto payments (ACH). That means you set up payments from your checking account, which are automatically drafted on certain days. Auto-payments are an excellent tool for ensuring you never forget a payment, but you still have to stay organized and ensure the money is in your checking account on the right day.

What to Do if You Can’t Pay Your Installment Loan

If you realize you’re not going to be able to make a loan payment, don’t ignore the problem. Reach out to the lender immediately and let them know what’s happening and why you may not be able to make the payment — for example, if you lost your job or had another change in income.

Many lenders have programs that offer assistance during such times. Even if there isn’t a program, it’s best to learn about all of your options, so you can move forward with all the information to create a plan for dealing with your debt.

In some cases, you may even be able to get a short-term loan to help you with a temporary financial issue. By working with responsible lenders you can apply for a loan and, if approved, receive instant, same-day or next-day funding.

FAQs About Installment Loans

How can I get out of an installment loan?

The best way to end a loan contract is to pay it off. You also may be able to discharge some loans in bankruptcy, but that would be a major hit to your overall financial health and credit. Negotiating with a lender for a longer payment period or refinancing with a lower interest rate may be options for dealing with the financial strain of a loan.

Can I go to jail for not paying a loan?

No, you won’t be arrested for not paying your debts. However, collectors do have legal methods for ensuring you pay, such as garnishing wages.

Do loan extensions hurt your credit?

Loan extensions shouldn’t affect your credit score and may be a good way to keep payments under control and avoid missing payments, which may be detrimental to your score.