What to Do If I Can't Repay a Personal Loan

You may have options even if you can't immediately repay your loan.
Image Credit: ShaunWilkinson/iStock/Getty Images

Loans can help you through a number of financial situations, but they can quickly become nightmares if you are unable to repay them. Though the ability to stop making payments and avoid the lender altogether may seem tempting, working with the lender to explore your options may be the best way to handle a loan you are unable to repay.

Call the Lender

Lenders can be surprisingly flexible in repayment terms, especially when faced with the prospect of not receiving repayment at all. Because collection activity and collection attorneys cost a considerable amount of money, many lenders will work with you to temporarily reduce the amount of your minimum payments. Some lenders will even allow you to skip a payment, adding that payment amount to the end of your loan term.

Any amount you do not pay will continue to accrue interest, though, so be sure to repay any payments you miss as soon as possible to minimize additional expenses. Missed payments may also show up on your credit report, making it more difficult and more expensive to obtain a loan in the future. Even if you are completely unable to make even minimum payments, good communication with the lender is critically important and may help ease legal troubles when the loan defaults.

Try to Refinance

If you are unable to make minimum payments but still have good credit, you may be able to refinance the loan. When you refinance, you get another loan for the outstanding balance. This loan is likely smaller than your original personal loan and may be spread over a longer repayment period, so the minimum monthly payment may be lower. Financial professionals at Western Federal Credit Union note that homeowners may be able to obtain a home equity loan or line of credit to pay off past-due personal loans; home equity credit typically has significantly lower interest rates and may cost less to repay.

Find Additional Income

In some cases, you may be able to get your finances back on track by temporarily finding an additional source of income you can use to repay the personal loan. Selling items in online auctions or classifieds can help you quickly raise additional cash. You may also consider picking up a second job to help catch up on missed payments.

Consider Bankruptcy

If you are completely unable to repay a large personal loan or have a very high amount of debt you cannot repay, it may be time to consider filing for bankruptcy protection. Bankruptcy is a serious process, though, and should be a last resort. Though bankruptcy can help you restructure or cancel most personal loans, the nonprofit organization Legal Action of Wisconsin notes that you may lose personal property, face forced repayment under court supervision, and carry a record of your bankruptcy on your credit report for seven years. Attorney Lander McLoyd of Ann Arbor, Michigan, also notes that you may be unable to discharge recent personal loans and payday loans through bankruptcy, so consult with qualified legal counsel before beginning the bankruptcy process.