What is Loan Default and How Will It Affect Your Finances?

Venus Zoleta

Venus Zoleta

Last updated December 05, 2022

Are you close to a loan default? Unexpected situations—like a job loss, medical emergency or death in the family, or calamity—can put even the most responsible borrowers in a tight spot, making it extremely hard to make loan payments on time.

Defaulting on a personal loan or any type of loan comes with serious financial consequences, not to mention that you'll spend stressful days and sleepless nights thinking about how to get yourself out of the sticky situation.

You don't want to reach that point—and you can keep it from happening. Don't let a loan default affect your finances.

What Does It Mean That a Loan Will Default?

A loan is considered in default if a borrower fails to make monthly loan payments or pays less than the required amount for a certain period (as specified in the terms and conditions). 

The time before a loan goes into default varies from one lender to another. Generally, borrowers in the Philippines have a maximum grace period of 90 days or three months to settle their outstanding balance before their loans become in default. That's the case for Pag-IBIG multi-purpose loans and housing loans.

Some banks have shorter grace periods before declaring a loan default. Citibank, for instance, places a personal loan in default if it's 60 days past due. (Note: This product is sold by Union Bank of the Philippines, using certain trademarks temporarily under license from Citigroup Inc. and related group entities.)

Can You Go to Jail for Not Paying a Loan in the Philippines?

loan default - can you go to jail for not paying loan

The Bill of Rights under Article III Section 20 of the 1987 Constitution states that "no person shall be imprisoned for debt." This means it's illegal for lenders and debt collectors to have you arrested or jailed for not being able to settle your debt, according to Atty. Aileen Amor - Bautista in her Ask Moneymax column about managing debt in the new normal.

She adds that imprisonment due to unpaid debt is a violation of human rights under the International Covenant on Civil and Political Rights, to which the Philippines is a party. This is why Filipinos won't go to jail if they default on a loan. But lenders can still file a civil case against delinquent borrowers for moral, exemplary, and/or other types of damages.

However, Atty. Amor - Bautista notes that when you issue a bouncing check or abandon your residence without informing your creditor, these actions can be used against you in a criminal case. So think twice before you decide to run away from your problem.

See also: Ask Moneymax: What to Do When Harassed and Threatened by Lenders? SLAP!

What are the Consequences of Loan Default?

Wondering what will happen if your loan is not paid? You can expect any of these loan default consequences when you have an unpaid bank loan in the Philippines.

1. Your Debt Will Pile Up

When you default on your personal loan, you'll owe more money because the lender will require you to fully and immediately repay the overdue balance, interest, penalties, and other charges.

For each month that your loan is unpaid, you'll have to pay a late payment fee of 1% to 36% of the unpaid balance or ₱300 to ₱800+, whichever is higher.

Simply put, this is what happens if your personal loan is not paid: you'll be buried in deeper debt.

Note: Under the law, a lender cannot collect interest from the delinquent or defaulting borrower if there's no contract. In the case of online loans, however, selecting "I agree" on the lender's Terms and Conditions on its website is considered a legally binding contract even if there's no written version of the document. Under Article 1356 of the New Civil Code of the Philippines, contracts are binding "in whatever form they may have been entered into."[1]

2. Your Loan Accounts with the Lender Will be Closed

Another consequence of defaulting on a loan is that the lender will close not just the unpaid loan account but also your other existing loan or credit card accounts with them. Worse, your unpaid loan account will go to a debt collection agency, adding more pressure on you to repay your loan.

3. The Lender Will Take Back Your Car or Home

loan default - repossession

Vehicle repossession and property foreclosure are some of the worst things that can happen to any borrower. These are the risks of defaulting on secured loans such as auto loans and housing loans.

As a way to recover their losses, lenders will take back the loaned car or house when you fail to repay the loan. For example, if you availed of an SSS housing loan, the SSS will foreclose the property as soon as you've failed to make six monthly loan payments.

Banks and other lenders will put the asset up for sale at a public auction. If the price of the repossessed property isn't enough to cover the unpaid loan, you will still be liable for the difference in amount.

4. Your Credit Score Will Drop

If you default on your loan payments, your credit history will suffer. Banks report unpaid loan accounts to credit bureaus in charge of computing your credit score.

With a bad credit history, you'll get a lower credit score that hurts your chance to get a loan or a credit card in the future. If you're lucky to be approved for one, you might be given a higher interest rate for your personal loan.

5. Unpaid Government Loans Will Be Deducted from Your Benefits

unpaid government loans

Failure to pay off your loan from the government can affect the benefits you can claim. For example, if you default on an SSS Salary Loan, SSS will deduct the loan balance—including the penalty and interest—from your retirement, disability, or death benefits.

For those figuring out how to pay their SSS loan past due, you can apply for the SSS loan restructuring program to help you catch up on your loan payments.

Final Thoughts

To find out more about loan default and its consequences in the Philippines, ask the lender or the government agency you borrowed from. You can also look for the loan default section in your loan's terms and conditions. When you're on the verge of defaulting on your loan, study your loan's fine print and find solutions accordingly.

Before worse comes to worst, contact your lender to explain your situation and negotiate your loan term. If you have an SSS loan that has defaulted or is about to default, consider availing of the loan restructuring program to ease up your loan payments.

Compare Other Personal Loan Options

Below is a list of trusted personal loan providers in the Philippines and their loan features. Compare your options and apply through Moneymax!

Personal Loan Providers Minimum Loan Amount Minimum Annual Income Approval Time

Citibank Personal Loan  
(This product is sold by Union Bank of the Philippines, using certain trademarks temporarily under license from Citigroup Inc. and related group entities.)

Compare Now

100,000 250,000 Fast approval time in as fast as 24 hours
Maybank Personal Loan

Compare Now
50,000 300,000 Apply for a loan online in just a few clicks
RCBC Bank Personal Loan

Compare Now
50,000 360,000 Get approved within 5 to 7 banking days
PBCOM Personal Loan

₱10,000 N/A Get approved within 1 to 2 days
SB Finance Personal Loan

Compare Now
₱30,000 ₱180,000 Get approved within 5 banking days
CIMB Bank Personal Loan

Compare Now
30,000 180,000 Apply within 10 minutes and get approved in 24 hours
HSBC Personal Loan

Compare Now
30,000 168,000 Get approved within 5 to 7 banking days
EastWest Bank Personal Loan

Compare Now
₱25,000 ₱180,000 Get approved within five to seven banking days
BPI Personal Loan

Compare Now
20,000 300,000 Get approved within 5-7 banking days
CTBC Bank Personal Loan

Compare Now
₱20,000 180,000 Get approved within 3 to 5 banking days
EasyRFC Multi-Purpose Loan

Compare Now
10,000 120,000 Fast approval time in as fast as 24 hours

Source: [1] Agreement on interest must be in writing (Acosta, The Manila Times, 2018)

Venus leads the blog content strategy and optimization at Moneymax as the Head of Editorial Content. She has 15+ years of experience in content marketing, corporate communications, and public relations. Venus graduated cum laude with a Journalism degree from the University of the Philippines Diliman. Before joining Moneymax, Venus had written informative guides and articles, specializing in personal finance and digital marketing. She also invests in stocks, mutual funds, VUL, and Pag-IBIG MP2. A hardcore Hallyu Tita, she enjoys bingeing K-dramas on Netflix while bonding with her rescued cats. Follow Venus on LinkedIn.