What happens if you miss a personal loan payment and how to deal with it? MintGenie explains

Missing loan payments, regardless of the type of loan, can have several negative consequences, including

• Financial penalties
• Credit score damage
• Debt consolidation
• Legal action

Failing to fulfill loan repayments can indeed induce stress, as certain borrowers may be anxious about potential legal repercussions or facing substantial penalty charges. Failing to make a personal loan payment may result in several adverse outcomes, such as

• Late fees: Unpaid payments often result in late fees imposed by most lenders, typically ranging from 1% to 2% of the overdue payment amount.
• Damaged credit score: Failure to make a payment can have a significant negative impact on your credit score, especially if it gets reported to credit bureaus. A lower credit score may make it challenging to qualify for future loans, or you might face higher interest rates.
• Increased interest: Certain lenders may apply interest charges to the overdue payment, contributing to a higher overall loan cost.
• Collection calls and legal action: Multiple missed payments could prompt the lender to transfer your account to collections, leading to persistent calls and letters. In severe cases, legal action might be taken by the lender to recover the outstanding debt, further impacting your credit score.

When seeking a personal loan, it’s crucial to consider the following:

• The specific repercussions of a missed payment will vary based on your lender’s guidelines.
• In the event of financial challenges preventing timely payment, it is essential to promptly communicate with your lender. They might be open to collaborating with you to establish a repayment plan.

Frequently Asked Questions (FAQs)

Q. Does taking out a personal loan help build credit history?

Having an extended credit history indicates responsible credit management over time, enhancing your credit profile and score. If you haven’t borrowed before, your credit history will be non-existent. Initiating a personal loan can serve as a beneficial initial step in establishing and building your credit history.

Q. How does timely repayment of personal loan affect your credit score?

Punctual settlement of obligations reflects positive credit conduct, indicating financial discipline and leading to an overall enhancement of the credit score. Making timely repayments on an unsecured personal loan has an even more pronounced positive effect on one’s credit score.

Q. How does a personal loan protect you from reaching maximum credit card utilisation?

Utilsing your credit card up to its maximum limit, known as credit utilisation, can adversely impact your credit score over time. Obtaining a personal loan can alleviate some of the strain on your credit card limit, consequently contributing to an improvement in your credit score.

Q. Why should you avoid approaching numerous lenders when seeking a personal loan?

When applying for a personal loan, lenders will conduct a hard inquiry on your credit report to assess your creditworthiness. While a couple of inquiries here and there may not significantly affect your credit score, an excessive number of inquiries can have a detrimental impact.

Therefore, refrain from hastily approaching numerous lenders. Instead, conduct thorough research in advance to identify reputable lenders that provide a combination of advantages, including competitive interest rates, reasonable processing fees, minimal or no prepayment charges, favourable loan tenure, a streamlined process, and minimal documentation requirements, among other factors.

Q. Does taking a personal loan improve or worsen your credit score?

A personal loan has the potential to impact your credit score both positively and negatively. When used responsibly, it can significantly enhance your score, but if not managed properly, it has the potential to lower it.