What Happens If You Cannot Repay a Personal Loan

If you are worried about keeping up with repayments on a personal loan, you are not in an unusual position, and you are not out of options. The consequences of missed payments are real and serious, but they do not arrive all at once. They follow a staged process that typically takes months, and at every point there are steps you can take to limit the damage and, in many cases, agree a way forward with the lender. This guide also covers the situation if you are considering a loan and want to understand the worst case before committing.

The single most important thing to take from this guide is that early contact with the lender, before a payment is missed rather than after, produces better outcomes than silence. Beyond the lender, free and impartial debt advice is available from StepChange (0800 138 1111), National Debtline (0808 808 4000), and Citizens Advice, and it costs nothing to call. Squared Money is not a debt advice service. This article explains how the process works so that you can make informed decisions about your own situation.

What happens when you miss a payment

When a personal loan payment is missed, the lender records the missed payment with the credit reference agencies. This marker appears on your credit file and is visible to other lenders for six years from the date it was recorded. It does not matter whether the payment is made a few days later. The missed marker is still recorded for the month in which the payment was due. This is the first and most immediate consequence, and it happens automatically.

After the missed payment is recorded, the lender will typically make contact, usually by letter or email, and sometimes by phone. This initial contact is a reminder, not an enforcement action. It will confirm that a payment has been missed, state the amount owed, and invite you to make the payment or to contact the lender if you are experiencing difficulty. At this stage, most lenders are willing to discuss the situation and, where appropriate, agree a short-term arrangement.

A single missed payment, followed by a return to normal payments, will leave a mark on the credit file but is unlikely to escalate further. The damage is to the credit score and to the payment record visible to future lenders, not to the loan agreement itself. The situation becomes more serious when payments continue to be missed over consecutive months.

How missed payments can escalate

If payments continue to be missed, the process follows a broadly predictable sequence. The exact timeline and the actions taken at each stage vary by lender, but the general pattern is consistent across the UK personal loan market. The table below summarises each stage.

Two points are worth emphasising. First, this process takes time. There is no stage at which the consequences are instantaneous. A borrower who engages with the lender or seeks advice at any point in this timeline has options that may prevent the next stage from occurring. Second, the process is not irreversible up to the point of court action. Even after a default is registered, a borrower who comes to an arrangement with the creditor and makes payments under that arrangement can prevent further escalation.

How unsecured default differs from secured default

A personal loan is unsecured, which means the lender does not hold a legal charge over any asset. If repayments are not maintained and the debt eventually goes to court, the creditor can pursue repayment through the mechanisms described above: a CCJ, attachment of earnings, bailiff action, or, in some cases, a charging order. What the creditor cannot do is repossess a property or a vehicle based solely on a defaulted unsecured loan. There is no direct link between the debt and any specific asset.

This is the key difference from a secured loan, where the lender holds a legal charge over the borrower’s property. If a secured loan goes into sustained default, the lender has the right to apply for repossession of the property. The property is at direct risk from the point the secured loan agreement is signed. For a full explanation of how the process works for secured lending, the guide to what happens if you cannot repay a secured loan covers the secured side in detail.

There is one exception that is worth noting. If a creditor obtains a CCJ against a borrower for an unsecured debt and the borrower owns property, the creditor can apply to the court for a charging order. A charging order converts the unsecured debt into a charge registered against the property, which means the property could, in principle, be at risk if the debt is not repaid. Charging orders are not automatic. They require a separate court application, and the court has discretion over whether to grant one. However, the possibility means that property owners with unsecured CCJs should not assume their home is entirely unaffected.

What to do if you are struggling to keep up

If you are worried about meeting a personal loan payment, the most productive step is to contact the lender before the payment is due, not after it has been missed. Most lenders have dedicated hardship teams, and FCA rules require them to treat borrowers in financial difficulty with forbearance. This does not mean the lender will waive the debt or reduce the amount owed, but it does mean they are required to consider reasonable arrangements.

The options a lender may offer include a temporary payment holiday (a short period, typically one to three months, during which no payment is required), a reduced payment arrangement (where the monthly amount is lowered for a period and the shortfall is added to the remaining balance), or a restructured term (where the loan is extended to bring the monthly payment down to a sustainable level). Interest may continue to accrue during a payment holiday, and a restructured term will increase the total cost of the loan, but both are preferable to missed payments and the escalation that follows.

If the lender is not willing to offer an arrangement, or if the borrower has multiple debts and the situation is more complex than a single personal loan, seeking free debt advice is the logical next step. A debt adviser can review the full financial picture, negotiate with creditors on the borrower’s behalf, and recommend a formal solution (such as a debt management plan, a debt relief order, or an individual voluntary arrangement) if one is appropriate. The guide to managing your personal loan covers the practical steps for staying on track before things reach this point.

The breathing space scheme

The breathing space scheme, formally known as the Debt Respite Scheme, was introduced in May 2021 and provides a period of legal protection for people in debt in England and Wales. During a standard breathing space period, which lasts 60 days, creditors are required to pause enforcement action, freeze interest and charges on the debts included in the scheme, and stop contacting the debtor directly to demand payment. The purpose is to give the person time to get professional debt advice and agree a plan for dealing with their debts without the pressure of ongoing creditor action.

Breathing space is not something the borrower applies for directly. It must be accessed through a debt advice provider, such as StepChange, National Debtline, or a local authority debt advice service. The debt adviser assesses the situation and, if appropriate, applies for the breathing space on the borrower’s behalf. The borrower is expected to engage with the debt advice process during the 60-day period and to continue making payments to creditors where they can afford to do so. If the borrower does not engage, the breathing space can be cancelled early.

A second type, called mental health crisis breathing space, is available for people receiving mental health crisis treatment. This lasts for the duration of the treatment plus 30 days afterwards and provides the same protections. It is accessed through an approved mental health professional rather than a debt adviser. The breathing space scheme applies in England and Wales. Scotland has its own statutory debt solutions, including the Debt Arrangement Scheme, which provides similar protections.

Where to get free, impartial debt advice

If you are struggling with debt, free advice is available from several organisations that are independent, confidential, and have no commercial interest in the outcome. These services can help you understand your options, create a budget, negotiate with creditors, and access formal debt solutions if they are appropriate.

StepChange (stepchange.org, or 0800 138 1111) is one of the largest debt charities in the UK. It offers a free online debt advice service and a telephone helpline. It can set up debt management plans, apply for breathing space on your behalf, and provide ongoing support throughout the process. National Debtline (nationaldebtline.org, or 0808 808 4000) is run by the Money Advice Trust and provides free, independent debt advice by phone and online. It has a particularly strong set of self-help resources, including fact sheets and sample letters for dealing with creditors. Citizens Advice (citizensadvice.org.uk) offers face-to-face debt advice through its network of local offices, as well as online and telephone support.

All three services are free. They are funded by the financial services industry through levies and grants, not by the people who use them. There are commercial debt management companies that charge fees for services similar to those offered free by these charities. It is almost always better to use the free services. The guide to personal loans and your consumer rights covers the broader consumer protections that apply to all personal loan agreements, including the right to fair treatment in financial difficulty.

Related tools

Frequently asked questions

Will one missed payment ruin my credit score?

A single missed payment will not ruin your credit score, but it will leave a visible mark. The missed payment marker is recorded on your credit file and stays there for six years. It is visible to any lender who checks your file during that period. The impact on the overall score depends on the rest of your credit profile. A borrower with an otherwise clean history will see a noticeable dip but can rebuild over time by returning to on-time payments. A borrower who already has a thin or fragile file may see a larger proportional impact.

The key point is that one missed payment, while damaging, is recoverable. It does not trigger a default, it does not result in the loan being called in, and it does not prevent you from obtaining credit in the future, although it may affect the rate you are offered. What matters most is what happens next. Returning to on-time payments immediately and maintaining them consistently limits the long-term damage. For a detailed explanation of how each type of event affects your file, the guide to how personal loans affect your credit score covers the mechanics in full.

Can a lender take money from my bank account without permission?

In most cases, no. A personal loan lender cannot unilaterally withdraw money from your bank account to cover a missed payment unless you have signed a continuous payment authority (CPA) as part of the loan agreement. CPAs are more common in short-term and high-cost lending than in mainstream personal loans, but it is worth checking the terms of any agreement. If a CPA is in place, you have the right to cancel it at any time by instructing your bank to stop the payments.

If the lender holds your current account as well as the loan (for example, if you borrowed from the same bank where you have your main account), there is a potential right of set-off. This means the bank may, in some circumstances, use funds in your current account to offset the arrears on the loan. The rules around set-off are complex and depend on the specific terms, but it is a reason to be aware of the arrangement if your loan is with your main banking provider. If you are concerned about this, a debt adviser can help you understand your rights.

What is the breathing space scheme and how do I apply?

The breathing space scheme (the Debt Respite Scheme) provides 60 days of legal protection for people in debt in England and Wales. During this period, creditors must pause enforcement action, freeze interest and charges, and stop contacting you to demand payment. It is designed to give you time to get debt advice and agree a plan for managing your debts without ongoing creditor pressure.

You cannot apply for breathing space directly. It must be accessed through a debt advice provider such as StepChange, National Debtline, or a local authority debt service. The adviser assesses your situation and, if appropriate, applies for the breathing space on your behalf. You are expected to engage with the advice process during the 60-day period and to continue making payments where you can afford to. The scheme applies in England and Wales. Scotland has separate statutory debt solutions, including the Debt Arrangement Scheme.

Will I go to prison for not repaying a personal loan?

No. Non-repayment of a personal loan is a civil matter, not a criminal one. You cannot be imprisoned for failing to repay a civil debt in the UK. The creditor’s remedies are civil in nature: they can apply for a county court judgment, and if the judgment is not satisfied, they can pursue enforcement through bailiffs, attachment of earnings, or a charging order. At no point does criminal liability arise from a failure to repay a personal loan.

The only circumstances in which debt can lead to criminal consequences in the UK are council tax arrears (where a magistrate can commit someone to prison as a last resort, though this is extremely rare) and debts arising from fraud. A personal loan taken out in good faith and subsequently not repaid due to financial difficulty does not fall into either category. If you are worried about the consequences of debt, a free debt adviser can help you understand exactly what creditors can and cannot do.

Can I negotiate a reduced settlement with my lender?

It is sometimes possible to agree a full and final settlement for less than the outstanding balance, but this is not a standard option and is not available in all circumstances. Lenders are more likely to consider a reduced settlement when the debt has been in default for some time, when the borrower can demonstrate that their financial situation means full repayment is unlikely, and when the borrower can offer a lump sum from a specific source (such as savings, a family contribution, or the proceeds of an asset sale).

A reduced settlement is a commercial decision for the lender. The lender weighs the certainty of receiving a lump sum now against the uncertainty and cost of continued enforcement. There is no right to a reduced settlement, and the lender is under no obligation to agree. If the borrower is considering this route, it is worth getting advice from a debt charity first, as the tax implications, credit file impact, and interaction with any other debts should all be understood before making an offer. A settlement for less than the full amount may be recorded on the credit file as “partially settled” rather than “settled,” which can affect future credit applications.

This article is for informational purposes only and does not constitute financial or legal advice. Squared Money is not a debt advice service. If you are struggling with debt, free and impartial advice is available from StepChange (stepchange.org), National Debtline (nationaldebtline.org), and Citizens Advice (citizensadvice.org.uk). The consequences of missed payments depend on individual circumstances, the lender’s policies, and the specific terms of the loan agreement. Missed repayments can affect your credit rating and may result in legal action.