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Late on Loan Payment? Damage Control
November 09, 2019

Late on Loan Payment? Damage Control

When you take out a loan, such as an SBA loan or a loan from an alternative lender, you agree to pay it back, usually via monthly payments over a certain time period.

However, sometimes life happens and you can’t make your loan payment on time. Maybe your business is experiencing slow sales, or perhaps you’ve had to pay for unexpected expenses like fixing broken equipment.

Regardless of why you missed a loan payment, it’s important to understand how it will affect you and what your options are in this situation. By doing so, you can protect your finances and avoid unpleasant financial surprises in the future.

In this article, we’re going to review:

  • What happens if you miss a loan payment.
  • How late loan payments affect your business credit score as well as your personal credit score. 
  • How you can avoid missing loan payments.

What Happens If I Miss A Loan Payment?

If you miss a loan payment, rest assured that you can fix the situation. While you may get hit with a late payment fee by your lender, you don’t have to worry about your missed loan payment ruining your credit right away.

According to federal law, a late payment cannot be reported to the credit bureaus until it’s at least 30-days past due. Therefore, a missed loan payment won’t take a toll on your credit as long as you make a payment before the 30-day mark arrives. 

In the event you’re unable to or fail to make your loan payment before the 30-day mark, you can expect your credit to take a hit. Since payment history plays a vital role in your credit score, even one late payment can significantly lower it and stay on your credit report for up to seven years. 

While you may be tempted to make a partial payment rather than no payment at all if you’re short on cash, you should know that a partial payment won’t keep your account from being reported late or sent to collections. 

If you know you’ll have trouble making a loan payment one month, it’s a good idea to speak to your lender. They may be able to change your due date or alter the terms of your loan. This will make your loan payments more manageable so that you’re able to fulfill your obligation.

Whatever you do, don’t ignore the situation and realize that a history of late loan payments can be quite problematic for your credit and future financial endeavors.

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Effects on Credit Scores and Ratings

As we stated, a late loan payment can have a negative effect on your credit scores if it’s more than 30 days old. While it’s difficult to say exactly how many points your score will go down, your payment history typically holds the highest weight in determining your score so you can expect a drastic decrease.

Does This Affect My Business Credit Score?

If your goal is to get approved for a loan, a lease, or a line of credit for your business, a late payment can make it more difficult to do so. With a late payment on your record, lenders, and vendors may view you as a risky borrower and offer higher interest rates and less favorable terms than you’d like. Simply put, a late loan payment may interfere with your business credit score and make it a challenge to start or grow your organization.

Does This Affect My Personal Credit Score?

A late SBA loan payment can hinder your personal credit score as well as your business credit score. Lenders may be less likely to approve you for a mortgage, car loan, personal loan, or other financial products. If they do approve your application, however, you can expect a higher interest rate and less attractive terms than you’d receive if you made all of your payments on time and have a track record of being a responsible borrower. 

How to Avoid Missing a Loan Payment

Fortunately, there are some things you can do to keep up with your loan payment and avoid financial issues in the future. Here are some tips:

  • Understand your loan payments and terms: Rather than just signing on the dotted line and taking out a loan, make sure you thoroughly understand the payments you’ll be responsible for and its terms. If you don’t feel confident that you can repay them, find an alternative option or work with your lender to alter your loan agreement.
  • Reduce your expenses: If you find that you’re having trouble making your business loan payment every month, take a look at your expenses and cut back on unnecessary spending. For example, you may want to review your budget and determine areas in which you’re overspending (such as overbuying inventory that isn’t selling).
  • Seek credit counseling: While one late loan payment may not warrant credit counseling, multiple late payments can make it a good idea. A credit counselor specializes in financial management and can help you improve your situation.
  • Be upfront with your lender: If you’re struggling financially and are unable to make an SBA loan payment (or are late on your payment to an alternative lender), let your lender know as soon as possible. They may be able to work with you to design a practical solution. The solution may involve reducing the size of your monthly payments or extending the length of your loan.

If you’re late on a business loan payment, take a deep breath and understand that you’ll be okay. As long as you don’t make late loan payments a regular occurrence, you’ll be able to financially thrive in your personal and professional life.

Have further questions on late loan payments? Feel free to drop us a line. Our team of business financing experts would be more than happy to help. You can also sign up for our newsletter for further advice:

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Frequently Asked Questions

When will a late loan payment affect my credit score and ratings?

A late loan payment will hinder your credit score and ratings if it is more than 30 days old. Therefore, it’s a good idea to make every effort to make your payment before the 30-day mark. 

Should I tell my lender if I am going to miss a loan payment?

Yes! By being honest and upfront with your lender, you may be able to work out a solution and prevent a late loan payment from impairing your financial history.

How can I avoid missing a loan payment?

To avoid missing a loan payment, try to reduce your expenses. If you find that your finances are spiraling out of control, credit counseling may be a good option.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].