What Happens if I Don’t Repay an Unsecured Loan?

July 1, 2022
Photo by Towfiqu barbhuiya on Unsplash

If an individual is forced to default on an unsecured loan, there is the potential that this could really negatively impact their credit score. This is because the lender will send all repayment activity to the Credit Reference Agencies, who are responsible for calculating credit scores. 

In addition to a negatively impacted credit score, the lender may decide to take action against the borrower in order to make back their money.

What is an unsecured loan?

An unsecured personal loan is a loan that an individual can borrow from a bank or private lender. Based on the interest rate charged, the individual will be required to make continuous repayments towards the money that has been borrowed, until the debt has been paid off completely and there are no more scheduled payments. 

There is no asset tied to this type of loan as it is unsecured. This means that if a borrower fails to make repayments on the money that has been borrowed, the lender cannot repossess any property or assets, unlike with secured loans which require a borrower to secure a loan against a property or other asset, as security.

What can a lender do if a borrower does not repay an unsecured loan?

Lenders can take legal action if a borrower fails to make repayments on an unsecured loan. This means that the borrower may legally be required to make the repayments by a judge.

If the borrower absolutely cannot afford to make any repayment to the lender whatsoever, it may be possible for them to get a write-off. The possibility of a loan being written off altogether will depend on the lender and the terms which the borrower agreed to when taking out the loan.

What are the terms under which a loan can be written off?

A loan may be written off for the following reasons:

  1. There were issues in the contract. If there was a problem with the contract, the borrower may be able to have the repayments written off. Problems could include the terms of the agreement being considered misleading, or having been forced to sign the agreement against the individual’s will, for example by an ex-partner. 
  2. The individual has a long-term health condition. It is possible that due to serious health reasons, an individual may be unable to make repayments on their loan. This will depend on the lender, the health condition and the seriousness of the situation.
  3. The individual is making small repayments. If the individual is attempting to make repayments but cannot make them in full, they may be able to request to the lender that the agreement is written off.

Is an unsecured loan the right option?

An unsecured loan should only be taken out if the individual is sure that they can repay it. Failure to make repayments can have serious repercussions such as legal action and a poor credit score, which may then mean in the future an applicant may be denied a loan.

It is always important to consider alternative options and only take out an unsecured loan if it is really necessary.

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