Coping with a Loan Default: What You Need to Know

Coping with a Loan Default: What You Need to Know

Defaulting on a loan can be quite distressing given the repercussions. For instance, you stand to damage your credit score for 6 years if you default on a loan in the UK. You can also lose your security if you had taken a secured loan. You may also be required to spend money you don’t have on court proceedings or renegotiating new terms. Loans are also bound to be very expensive for you going forward if you can get them at all. In simple terms, it’s in your best interests to do whatever you can to avoid a loan default. However, a loan default can happen despite your best interests to avoid it so, how do you cope with life?

Dealing with a looming default: Contact your bank immediately

First and foremost, most defaults have telltale signs. Most people can tell ahead of time if they will be able to meet their loan repayment obligations. Instead of waiting to default, you should contact your bank immediately. Banks are usually ready to help clients who have difficulty repaying their loans. For instance, banks can change repayment terms to make repayment easier. Banks can also assign financial experts to offer financial advice on budgeting, saving, etc. In a nutshell, you can do a few things to avoid a default. Furthermore, it’s in the best interests of banks to help their borrowers avoid default so you shouldn’t wait to default helplessly. Instead, contact your bank and see what options you have. Be proactive!

You’ve already defaulted, and you don’t have any money. Now, what?

If you’ve already defaulted because you don’t have any money, you still need to contact your lender. Many people fail to contact their lenders after a default because they don’t see how it will help if they don’t have any money. This shouldn’t be the case. Contacting your lender is still important even if you are broke because it shows you still have the intention to pay. If you stay silent, your lender has no reason to believe you want to repay (even if you do), so they will take the worst possible action i.e. call auctioneers, take charge of the collateral, initiate court action against you, etc. If you have been meeting your repayment obligations religiously, staying silent doesn’t help after a loan default. You must work with your lender if you want to get the best possible outcome.

What if your debt has been assigned to a debt collection agency?

Some lenders don’t handle defaults internally. If that’s the case with your default, talking with your lender won’t help much. You are better off talking to the debt collection agency if your debt is already in collections. Like most lenders, collection agencies are willing to negotiate with defaulters who have show goodwill and in most cases ready to settle for much less than the value of the debt. In a nutshell, it is possible to negotiate and get a favourable solution. The interactions must, however, be formal, preferably written and not over the phone.

After negotiating new terms: Maintain a good relationship with your lender or collection agency
After you have reached an amicable solution to dealing with your default, you need to maintain a healthy relationship with your lender or the collection agency to be able to deal with the default conclusively. For instance, you need to keep your lender informed about the progress of the new repayment plan, your finances, etc. If you had defaulted on a business loan, your lender needs to know how the business is performing. If you had defaulted on a personal loan, your lender should be constantly aware of the status of your personal finances.

Keeping your lender well informed at all times ensures they are always ready to act on new requests. Like all good relationships, you should be honest at all times. If your financial situation has improved, you should communicate the same and be willing to amend terms. You should also be prepared to do regular reviews. Developing a good relationship with your lender after a default has many advantages. For instance, besides getting better terms, you also stand to get free financial advice on how you can turn around your financial situation.


If you default and can’t possibly repay your loan because it is too much, you can consider filing for bankruptcy. This must, however, be a last resort move given the dire consequences of filing for bankruptcy in the UK.

Mark Scott

Is the Company Director of Swift Money Limited. He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

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