What Happens if I Don’t Pay for an Unsecured Loan?

For most Americans, If we exclude the amount we owe on the home, the majority of the debt we have to pay is unsecured debt. Unsecured debt can include credit card debt and student loans, individual loans, cash advances, medical debt and retail store accounts, and cash loans from friends or relatives. This article will cover how to deal with unsecured debts. It will also discuss what happens if you fail on these kinds of debts and the alternatives you have to deal with when you default.

What is an unsecured loan?

The types of loans available are that are secured loans and unsecured loans. The term “secured loan” refers to one secured by property or assets as an assurance of repayment. The property or asset which you promise to make the loan secure is referred to as collateral. 

The most popular kind of secured loan would be a mortgage because they are tied with the property purchased using money from the mortgage. If you do not repay your loan, then the lender could take the property you bought with the mortgage loan to pay back. Another kind of secured loan is an auto loan which functions the same way.

Unsecured loans are loans that any other assets or funds don’t secure. Most often, the only thing backing this loan will be your commitment to repay it. The most commonly used kind of loan that is unsecured is a credit card. Apart from the agreement you sign to pay back the money you have borrowed from the credit card, many credit card issuers do NOT have the right to use the items you purchase using cards as repayment if you don’t make payments. Other types of loans that are not secured include student loans, business loans, and debt consolidation loans. The debt consolidation loan can be a standard method of combining multiple debts due on various unsecured accounts into a single loan that has a single monthly payment. A student loan is also a form of secured loan, but they are more often related to secured loans. If you get a student loan, you don’t solely “agree” to pay the loan, but also execute what is known as”a “promissory note.” The promissory note becomes an asset for the loan, similar as the word “check” guarantees you from having to make payments for goods that you purchase using the check.

Since their loans aren’t secure by collateral, many unsecured creditors depend on their trust and goodwill to ensure that you’ll pay back your debts. An account of how you spend the obligations you have made to yourself is recorded by various major private corporations called credit bureaus. These bureaus create credit reports on the loans you have taken out and your record of defaults and payments. 

The information is then recalculated to an individual bureau’s evaluation of the credit rating you have. The scores of all three bureaus are compared to the score of the other borrowers to evaluate your creditworthiness in general. When you pay the monthly payment, your lender will submit this information as positive to credit bureaus, providing other credit institutions that deal with consumer loans an excellent indication of your financial strength. If you default on the payment or cease to pay entirely, they will provide this information, primarily to alert lenders that you failed to complete the payment as in the loan contract. This could result in your credit score dropping and could cause one or more of them to deny providing you with money in the future.

In addition, the requirement to report your credit history in the credit bureaus, certain lenders may also require you to agree to automatic monthly payment deductions through your bank account as part of the requirements for getting an unsecured loan. The automatic monthly deductions do not just increase the chances of you making the payment each month. However, they also guarantee that your payment is paid punctually. Additionally, the automatic monthly deductions are sometimes difficult to end, requiring you to notify your lender as well as your bank to get the payments ended.

What happens if I default on a loan that is not secured?

An unsecured loan that isn’t secured doesn’t mean that there aren’t any consequences when you don’t pay back the debt or pay your bills punctually. Many creditors charge hefty late payment charges each month when you do not pay in time. Additionally, if you’ve agreed to have your payments deducted automatically from your account, and the funds needed to pay for the amount aren’t available if your lender is unable to make the payment, your account likely to be overdrawn, which will result in more substantial fees for insufficient funds charged from your financial institution. Insufficient funds and late fees associated with business loans may even be higher since business loans aren’t typically covered under federal or state consumer protection legislation.

Inability to pay your loan on time is referred to as delinquency, and it could be costly. If you do not pay your loan in total for several months, you’ll be in default on loan. When your loan is in bankruptcy, the loan will likely be given to the debt collector. They will start calling you multiple times a day to request payment for the loan. The calls are usually followed by letters of a threat sent by mail. If none of these methods for collection work, the debt will likely be handed over to a legal firm for debt collection that represents both the collector and the creditor who initially made the call.

While many law firms try to negotiate a settlement or collection for the debt, they are not obliged to do this. In addition to a letter notifying you that they’ve taken over the debt and provide details on how you can send your payment, the sole letter you could get from them would be a notice of a lawsuit requiring you to attend court. After the case is filed, the lender is less likely to pay the debt or provide reasonable terms to repay. This is because if the lender wins the case, a judgment is issued against you. An assessment is an order that states your debt is due and the debt must be paid. The decision from the judge then secures the unsecured debt.

In addition to the various ways to enforce a judgment available to the creditor, like garnishments and bank accounts levies. The bank can also report the review to credit bureaus, which can significantly reduce your credit score. The judgment may be on your credit report for at least ten years regardless of whether you pay it or not. This is as well as other adverse information that appears on your credit report that could remain on your credit report for up to seven years. All of this will impact the likelihood of you obtaining credit shortly and result in significantly higher interest rates for any credit you eventually get.

What options do I have after the default?

There are real-world consequences for failing to repay unsecured debts, and ignoring it after the default is not an alternative. You could take steps to stop the default on your loan and stop it from growing. It is possible to legally relieve yourself of the obligation to pay it back in full.

The first thing to attempt after you’ve fallen behind on conditions of an unsecured loan is to call your lender in person. Inform the lender and let them know that you’re looking to pay off the debt but require their assistance in achieving this. Many lenders will allow one or more loan installments and lower the minimum monthly installment, eliminate charges for late payments or exceed the limit, or even temporarily reduce interest rates.

Suppose you’re unable to negotiate an acceptable agreement with your lender. Make contact with an agency for credit counseling that is non-profit. The credit counseling agencies that are licensed will assist you in developing a debt management program that will consolidate all of your debt payments that are not unsecured into one convenient monthly payment, typically with lower interest rates and a waiver of late or over-the-limit payment charges. If you decide to seek assistance in negotiating with your creditors, make sure you’re dealing with an accredited credit counseling company and not an unlicensed private debt settlement business. The firms that offer debt settlements try to settle unpaid debts against your lenders for less than the amount you have to pay. These firms are profit-driven and may charge significant charges for every loan they settle on behalf of you. In addition, there are many scams. If you are considering a debt settlement option that appeals to you, ensure that you investigate the debt settlement process before committing to this type that offers debt relief.

Making a new loan to pay it off

Another option for dealing with debts that are unsecured and in default involves getting a new consolidating loan to pay off existing high-interest debt. The type of loan you can be in the form of a non-secured personal loan, a home equity line of credit, loan to home equity of honor, and credit card balance transfers. Home equity loans, as well as home equity lines of credit, are extremely risky since the unsecured loan can be secured through the equity of your home, and you could put your home’s equity at risk should you fail to pay it back. However, the advantages of debt consolidation loans can often be sufficient to offset most of the risk. For instance, a debt consolidation loan can combine several delinquent unsecured loans into one new non-delinquent, unsecured loan. It comes with one monthly loan payment, and the interest rate is lower than loans that you pay off in separate installments. Be aware that taking out another unsecured loan will typically require an examination of credit and, if you’ve failed to pay your loan with another lender, getting approval isn’t easy. Likely, you will only get the loan to consolidate debt if you have credit that is still good. However, DMPs don’t need you to have excellent credit. If the debt consolidation loan you are looking for isn’t a choice for you, then a DMP could be better.

Relieving Stress Through Bankruptcy

Most of the time, the event that you must take out a loan to make payments on any loans you have, indicates more significant problems with your finances that might require addressing by filing bankruptcy. 

It does not just deal with the issue of delinquency for your unsecured debts, but it also removes all eligible debts. If you file bankruptcy, the majority of all your unsecured debts will be discharged upon the end of your default, leaving you free of the obligation to pay back this debt. Specific exceptions to this rule are available for newly opened credit lines and purchases made within a year from the date of filing the bankruptcy petition.

Bankruptcy also puts an end to the harassing calls to your home and other actions of collection from lawyers as well as collection companies. While it’s true your credit score may be affected initially in the event of bankruptcy, this decrease in your credit score won’t be very significant if your entire loans are already in default. Indeed, many creditor’s views are more favorable towards those who have filed for bankruptcy than before bankruptcy because the person is taking proactive steps to solve their financial difficulties. In the end, you can often rebuild your credit and increase your credit score within a short time after filing bankruptcy with prompt payment of a vehicle loan or secured credit cards. A few people describe bankruptcy as an open-heart procedure. The procedure can save your life, but you must adhere to the diet low in fat afterward to address the root health issue which threatened your life in the first place, to maximize the benefits of the new beginning.


There are consequences for not paying off your debts. However, there are solutions to help you effectively manage it. The first step to deal with the unpaid debt is never to avoid paying your debts. If you decide that bankruptcy is the most effective option available for your situation, IPASS can help.