What to do if you cannot repay a loan

What is the first thing to do when you cannot pay?

Contact your credit provider as soon as you know there is a problem. The National Credit Regulator says that if you think you cannot meet your instalments, you should contact your credit provider immediately and try to re-arrange payments, and that you should not wait until you skip payments.

Lenders deal with this situation often. Phoning early shows good faith and gives you more choices than staying silent. Before you call, write down your income, essentials and the amount you can realistically pay each month.

• Have your account number and agreement ready.
• Know what you can pay now and when your next income arrives.
• Ask what options the lender offers, such as a revised payment date or smaller instalments.
• Ask for any new arrangement in writing.
• Keep notes of the date, time and name of the person you spoke to.

How do you ask for a payment arrangement?

A payment arrangement is an agreement between you and the lender to change how or when you pay. It could mean a new date, smaller payments over a longer period, or a short pause. What is on offer depends on the lender, and the lender decides.

Make your request by phone and follow up in writing, by email or message, so there is a record. State the amount you can pay and the day you can pay it. Then pay what you promised, on time, every time. A small payment that arrives is better than a large one that does not.

What happens if you miss a payment?

Missing a payment can lead to default charges, collection costs and a mark on your credit record. The NCR states that paying late or not paying the full instalment will adversely affect your credit rating and possibly your ability to take out credit in the future.

Before a lender goes to court to enforce an agreement, the National Credit Act requires it to send you a written notice, known as a section 129 notice. The NCR says the notice must tell you about your options: to seek help from a debt counsellor, to use an alternative dispute mechanism, or to bring your payments up to date. Do not ignore this letter. If you do not understand it, ask for advice.

You also have the right to reinstate an agreement by paying all overdue amounts, including default charges and the reasonable costs of enforcing the agreement, before the lender cancels it.

What is debt review, and how does it work?

Debt review, also called debt counselling, is a formal process under the National Credit Act for people who are over-indebted. You apply to a debt counsellor registered with the NCR. The counsellor compares your income against your basic expenses and debt obligations and accepts the application only if you are found to be over-indebted.

If you are accepted, the counsellor negotiates reduced payments with your creditors and proposes a restructuring. The restructuring must be confirmed by a Magistrate's Court or the National Consumer Tribunal. During the process you continue to make the payments the counsellor advises, and the NCR describes you as protected from legal action such as repossession while it runs.

Debt counselling has costs. The NCR says all fees must be disclosed to you in writing, and that you do not need to borrow money to pay them.

• You apply voluntarily to a debt counsellor registered with the NCR.
• The counsellor assesses whether you are over-indebted and tells you the outcome.
• Your credit providers and credit bureaus are notified.
• The counsellor proposes new, affordable payments to your creditors.
• A court or the National Consumer Tribunal confirms the restructuring.
• You pay as advised, directly to creditors or through a registered payment distribution agent.

How does debt review affect your credit record?

While you are under debt counselling, credit bureaus add a debt counselling flag to your profile. The NCR states that the flag is not a negative listing. It is an indicator that you are under debt counselling.

You cannot apply for new credit during this time. Once all restructured debts are paid in full, the debt counsellor issues a clearance certificate, the bureaus remove the flag and information about the restructured debts is expunged.

Weigh this carefully. Debt review limits new borrowing for a while, but it can bring your payments to a level you can sustain and give you protection while you recover.

Where can you get help?

Start with the lender, then use the public bodies below. The NCR call centre is on 0860 627 627, and the NCR can help you find a registered debt counsellor. Confirm contact details on the NCR website before you use them.

If you have a complaint about how a non-bank lender has treated you, the National Financial Ombud Scheme handles credit disputes, and it says its services are provided free of charge. Contact the NFO on 0860 800 900.

How can you protect yourself from falling behind again?

Once the immediate pressure eases, build a plan that stops it coming back. A written monthly budget is the foundation. The NCR advises working out your income and total expenses, planning for unexpected costs, and keeping receipts for every payment.

Put repayment dates in your phone calendar and keep money in your account on debit dates. If you can, build a small savings habit, even a modest amount each month, so a surprise bill does not push you back to a lender.

• Check your credit report once a year; you are entitled to a free report each year from each registered bureau.
• Borrow only what you can repay from your next income.
• Do not borrow from a second lender just to pay the first, unless you have checked you can afford both.
• Never pay an upfront fee to anyone who offers to fix your debt or arrange a loan.
• Use our affordability guide before any new application.