A 2017 survey carried out by the Bank of England found the highest numbers of customers defaulting on loan repayments since the beginning of the financial crisis. This is a worrying statistic for both credit providers and consumers. It also means that, for many borrowers, being aware of how a potential arrears situation could arise – what the implications are and how to deal with it – could be essential knowledge.
How do loan arrears arise?
If you miss a repayment on a personal loan then you will find yourself in arrears. There could be any number of reasons for this, for example, you may lose your job or experience a change in lifestyle that means you have less disposable income. You could even just have a single month of poor budgeting. But however it happens the results will be the same – you will be considered behind with your personal loan payments.
What’s the difference between arrears and default?
These are two separate stages in the process of failing to make payments on a personal loan. The arrears letter is usually the first stage in the process. This will act as a way of notifying you that you have missed a repayment, or repayments, on your personal loan. The letter will usually set out the date of the missed payment, as well as the amount and what you need to do to rectify the situation. A default means that the lender has reached the stage of assuming that the lending agreement you both signed up to is now breached. Defaulting on a payment is more serious than simply being arrears, which can be rectified simply by paying off what you owe, which may be just one or two payments. When a default occurs the credit provider can take more significant action, including requiring the entire loan to be repaid or taking legal steps. The presence of arrears of defaults on your credit file will lead to you having a so-called “bad credit history” with all that that implies in terms of obtaining further loans & credit.
How to deal with being in arrears
If you get an arrears letter in the post from a lender you’ve borrowed from then the most important thing is to take action as soon as you can. Although loan arrears will likely show up on your credit report, if you can remedy the situation quickly then you’ll be able to prevent serious damage. Contact the lender and let them know why you have missed the payments that were due. In most cases, lenders are keen to ensure that borrowers keep making repayments. So, if there is another way to enable you to do this, such as lengthening the term of the loan, they may be willing to help you out.
What happens in a default situation
Default situations tend not to occur straight away. If you’ve missed three to six payments then you could end up on the receiving end of a default letter but not usually before this point. Defaults can only be issued for debts that are covered by the Consumer Credit Act (this will include most personal loans) and it’s important to note that you’re required to be notified of the default in writing. You can still stop a default situation from escalating, even after you have received a default notice. The first thing to do is contact the lender and explain your situation – you may want to try making suggestions about how it could best be resolved to see if the lender agrees to help you. However, once you get into a default situation it’s not possible to escape the fact that this will leave a mark on your credit report. In fact, a default stays in your credit history for six years after it happens. During that time your credit score will be lower and you may find it tougher to take out any new credit.
What to do if you think you’re heading into arrears or default
Assess the situation. Work out exactly how much you owe and why this has happened. Look for opportunities to make up the arrears or default – prioritise this over other spending if you have to.
Speak to the lender involved. Most lenders appreciate being contacted before they have to go to the trouble of sending out an arrears or default letter and may be more willing to help you restructure your lending so that it becomes more affordable.
Look for specialist debt advice. If you’re really struggling with your debts and can’t see a way to pay what you owe it’s always worth speaking to the experts. A debt specialist will be able to assess your situation with an experienced eye and make suggestions for solutions, as well as providing reassurance that there is always something you can do.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley