Borrowing money can offer life-changing results, helping pay for dream holidays, cars, home improvements and a whole host of opportunities.
However, failing to keep on top of your repayments has serious implications including potential court action, affecting your ability to borrow in the future and even hindering your future employability are all possible outcomes.
While the more severe outcomes will be from missing multiple payments, it’s important to consider that even one missed payment can have an impact on your credit score.
There are five main consequences of missing payments. They are, in order of severity from first to last, as follows:
- Be charged a fee and interest on any missed payments
- Damage your credit score
- Multiple missed payments leading to a default
- Potential involvement of a debt collection agency
- Be issued with a county court judgement (CCJ)
- Potential attachment of earnings order
- Lose your home, if it’s a secured loan
How to avoid missing a payment
The smallest penalty is being charged a fee and extra interest as a consequence of missing a single payment. The fee will depend on your loan provider and the conditions of your agreement but typically can range from £10-£30.
It’s easy to miss payments just due to bad organisation, so setting up direct debits and always making sure you have enough money in is crucial to avoid this. Some bank accounts put aside money to make your payments for you. If you do miss a payment by mistake, if you can afford to pay it then do so as soon as you can and contact your lender - they may not report it on your credit file if it’s quickly dealt with.
If you miss a payment and don’t come to an arrangement with your lender, it will almost certainly be recorded on your credit file, which can cause your score to drop. A single missed payment isn’t great but is repairable, and will gradually have less of an impact on your credit score over time.
I can’t afford this month’s loan payment, what should I do?
If you’re struggling with repayments, here’s a five step plan to get you back on track.
- Work out your total debt and re-budget if necessary
- Prioritise high-interest accounts
- Get in touch with your lenders or creditors
- Explore alternative lending options
- Speak to a professional for free
1 - Work out your total debt and re-budget
First things first, figure out exactly what you owe and the cost of owing that money. Make a record of the total amount of debt on each account alongside the minimum monthly payment and the interest rate.
Add all the minimum monthly payments together and you have the amount of money you need to keep up with payments, or ‘service’ the debt, each month. If you can hit this figure by cutting out other non-essential expenses (e.g. TV subscriptions, gym memberships), then you can avoid any immediate consequences. Increase your payments as soon as your budgets allows to ensure that you get out of debt as quickly as possible.
2 - Prioritise high-interest accounts
If you can afford to pay a bit extra than the amount needed to service your debts, even by an extra £10, then this will help you get out of debt quicker. Look to pay the extra amount on the account with the highest interest rate account as this will save you more cash in the long run.
Also check for priority debts, as these are more important than loan repayments. Examples of these are council tax, rent or unpaid income tax. These are a higher priority because the consequences are more severe, including being evicted or sent to prison (see a full explanation of priority debts on Citizen’s Advice).
3 - Explore alternative lending options
If your loan repayments are unaffordable, it might be cheaper to transfer them elsewhere as there may be cheaper loan providers available. Alternatively, it might even be cost effective to transfer the money to a credit card if you can find one which charges little or no interest for the first 12 months or more.
If you head to price comparison websites you can use soft check eligibility tools to see how likely you are to be accepted for a new deal. They often take seconds or minutes for you to be given a decision, and as they are soft checks they won’t impact your credit score.
Equally, if you have a number of debts with a high-interest rate you may want to consider a debt consolidation loan to keep them all in one place. This may leave you with a cheaper and more manageable monthly payment, but you need to be sure you won’t be tempted to rack up more debt by spending on your credit cards again.
4 - Get in touch with your lenders or creditors
If none of these solutions put you in a position to manage your monthly repayments, it’s time to accept that your debts are too high for you to keep on top of. As we said earlier, this is a lot more common than you’d expect, and as scary as it may feel it is something you can recover from.
Once you’ve realised this, contact your lenders and let them know. They will deal with this on a regular basis, so will have procedures in place to fix the situation for you and them. If your issue is with a single payment you may be able to take a payment break or reduce your payments over a set period of time (say if you’ve lost your job). This can be via freezing payments and/or interest amounts, which will potentially help you get the breathing space you need to help you get back on track financially.
Again, set a priority system with this, so focus on either the debts with the highest interest or the ones you owe the most to. At this point it’s about making things affordable rather than saving money over time. You need to make your payments manageable within your budget, so speak to more than one of your lenders if needed.
There are consequences for your credit score with this, so avoid making arrangements with many lenders if you don't have to. Always find out what impact this will have on your credit file when discussing any new payment plans with your lenders as well. That way you can minimise the impact it will have on your score.
5. Speak to a professional for free
Don’t just rely on communicating with your lenders - also chat to a professional. Free and impartial debt advice is available for anyone from charities like Citizens Advice, StepChange and the Debt Advice Foundation.
They are experts in helping people get out of sticky financial situations, and will not offer you advice based on the lenders’ best interests. You can draw up a plan for getting yourself out of debt and into a better financial situation through them, as well as ask them to communicate with your lenders on your behalf.
What happens when you repeatedly miss payments?
If missed payments become a consistent trend then you run the risk of the more severe consequences building up, which can be much more damaging. As well as further interest, late fees and the impact on your credit score, repeated missed payments can lead to you defaulting.
When you default, you move into the phase where the lender is looking to recover the money that you borrowed. By law, Section 87 of the Consumer Credit Act 1974 to be specific, they can do this when the credit agreement terms have been breached. Typically it’s when the account has “been in arrears for three to six months” according to Check My File.
Even then, lenders will send out a Notice of Default, which gives at least two weeks for you to come to an arrangement before it appears on your credit file. They are legally allowed to demand the amount repaid in full, but they may prefer to come to an arrangement with you if you can demonstrate a willingness to communicate and get yourself back on track.
It’s extremely important that you do not ignore a default notice if you get it, and contact the lender straight away. Doing so can avoid the default being reported on your credit score if you resolve the matter with them. Paying the amount in full before the deadline is up will also do this.
You can also look to get free and impartial debt advice, from either Citizens Advice or a debt charity such as StepChange or the Debt Advice Foundation. They will be able to advise you of your options and help you deal with the situation as best as you can.
How long will a default stay on my credit report?
If the default is recorded it will stay on your credit score for six years, irrespective of whether you pay it off (although once it’s cleared it will be marked as satisfied, which looks better to lenders).
The good news is it’s impact lessens over time. Debt Camel says that Experian removes 350 points from your credit score for a default, but only 250 when it is two to four years old, and 200 when it is four to six, after which it’s removed entirely from your score.
How a default can become a CCJ
If you default and don’t repay the loan or fail to come to an agreement with your provider, then they may take the matter to the court.
A County Court Judgment (CCJ) is when the lender has requested that the court place a demand upon you to pay the money back, which will involve a hearing to decide whether they have a case.
If the court decides you do owe the money, they will set out a plan for you to pay it back. If the loan was secured against your property or car, then legally the court can hand them over to your loan or mortgage provider as part of the repayment terms.
You can dispute the payment if you feel that you do not owe the money, but this will involve a private hearing where you have to prove that. It will also involve a court fee of £255. It’s only worth doing if you genuinely believe that they are in the wrong. It’s not a good tactic to delay or prevent repaying the money you owe.
Beyond the potential of losing your car or home, CCJs are bad for credit scores, as they are a huge red flag to lenders. It may also impact on your current job if you have a degree of financial responsibility. And for the future, certain employers may run credit checks as part of their decision-making process before offering you a role (although it’s by no means standard practice). So they are definitely something you should avoid.
Again full communication with your lender can possibly avert the matter going to court, and the aforementioned Citizens Advice, StepChange and the Debt Advice Foundation can all offer you advice on how to deal with one. Whilst you should do everything you can to avoid a CCJ, there are always ways to move forward if you do get one. Any mistakes from bad financial activity can be repaired over time.
Settling a CCJ
If you pay the full amount on the CCJ within a month of it being issued, and the lender lets the court know, the CCJ can be removed from your credit report. You can get the court to do this if you can prove your payment in the instance that your lender doesn’t let them know, but this may incur a fee.
The final thing that can happen if your debts exceed £5,000 is bankruptcy. This can be either voluntary if you feel incapable of repaying all your debts, or involuntarily done if the creditors you owe money see it as the only way of retrieving what you owe.
Bankruptcy is an extreme action due to the impact it has on you. If voluntary, it’s something you should only really consider if there are no alternatives and, generally, you have unsecured debts of £20,000 or more. While bankruptcy will effectively clear your debt, it will also use everything you own to try and pay for it (other than essential items you need for working or living).
Borrowing money will be extremely difficult in the future if you have been made bankrupt, as it will stay on your credit file for six years. Whilst bankrupt you are legally obliged to let anyone you are trying to borrow money over £500 from about your bankruptcy - failing to do so is a criminal offence.
Bankruptcy can be the only option in some cases, but there are alternatives. The charity Step Change have a Debt Remedy tool which will analyse your circumstances and offer the best plan for you.
As mentioned, bankruptcy isn’t always voluntary. If you have good assets the people you owe money to might want to force bankruptcy as the only way to recover the highest possible amount from what they owe, as well as other reasons. The only right course of action in this case is to seek expert legal advice (you may be eligible for legal aid).
There’s plenty of budgeting information and help out there if you can’t manage to pay back your loan, so it’s important you consider your options and seek advice straight away.
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Intelligent Lending Ltd is a credit broker working with a panel of lenders.