What If I Can't Repay an Unsecured Loan?

by Craig Berman

Contrary to what unscrupulous debt collectors might say, you can’t go to jail for failing to pay unsecured debt. Nor can creditors seize your house, your car or your personal items to get their money. They can, however, take reasonable measures both to collect their debt and to make sure other lenders know your unreliable bill-paying history, so failing to repay an unsecured loan can lead to negative consequences now and in the future.

Save Your Stuff

One benefit to unsecured loans is that, as the name suggests, you don’t have to back that loan up with an asset. If you take out a car loan, for example, the bank can repossess the car if you stop making payments. But if you have unsecured credit card debt, the bank can’t come into your house and take your groceries and TV set.

Credit Report Woes

One consequence if you can’t repay an unsecured loan is a lower credit score and unflattering credit report. Whoever issued your loan may start reporting it as delinquent 30 days after you fall behind, and each delinquency is another mark against your credit record. This not only makes it harder to get future loans, it can also hurt your ability to find a job. Prospective employers often check credit reports before making their decisions, which could keep you from earning that coveted job or promotion.

Rising Rates

Failure to repay one unsecured loan may leave you having to pay more money for any other unsecured loans you have. If you take a cash advance on your credit card and fail to pay it back, for example, other issuers can raise your rates even if your record of repayment there is pristine. It can also force you to pay higher rates for insurance, since underwriters may see you as more likely to make a claim.

Collection Efforts

Banks are unlikely to simply accept your word that you can’t repay the debt. You can expect a series of phone calls and letters, first from the original issuer of the unsecured loan and then from a collection agency if the issuer chooses to outsource debt collection. If the unsecured loan is large enough that the company chooses not to write the debt off, it can sue in civil court and win a judgment for the balance and collect it by garnishing your wages.

Unsecured Student Loans

Student loans fall into their own separate category of unsecured debts. Because many loans are guaranteed by the government, it’s easier for lenders to take actions like garnishing wages and benefits. Lenders can intercept tax refunds and Social Security payments to get their money. Unlike other unsecured debts, they often cannot be discharged in bankruptcy, so failure to pay them off in a timely fashion generally leads only to increased penalty and interest charges and a larger amount to pay back later.