What happens if you can’t repay a personal loan in Canada?

Life doesn’t always go according to plan. A job loss, illness, or unexpected expense can make it difficult to keep up with loan payments. If you’re unable to repay a personal loan, the consequences depend largely on how late your payments become and how quickly you address the situation.

From late fees to credit score damage and possible legal action, the impact typically escalates over time. Understanding how the process works can help you limit long-term financial harm.

What happens if you miss a personal loan payment?

If you miss a payment, the consequences usually progress in stages. While policies vary by lender, most unsecured personal loans in Canada follow a similar pattern.

If your payment is a few days late: Late fees, continued interest, and reminder notices

When a payment is only a few days past due, the impact is usually financial rather than credit-related. Depending on your loan agreement, your lender may charge a late payment fee once the due date passes. Interest will continue to accrue on the outstanding balance, increasing the total amount owed.

If your payment was scheduled as a pre-authorized debit and fails due to insufficient funds, you could also face an NSF (non-sufficient funds) fee from your bank, and potentially a returned-payment fee from the lender.

At this stage, you will likely receive reminder emails, account notifications, or phone calls. In most cases, payments that are less than 30 days late are not yet reported to Canada’s credit bureaus. Bringing the account current quickly can often prevent credit score damage.

If your payment is 30 days late: Delinquency and credit score impact

Once a payment reaches approximately 30 days past due, the account is generally considered delinquent. Most lenders report 30-day late payments to the credit bureaus, and this is typically when your credit score may begin to decline.

Payment history is the most significant factor in calculating credit scores. A reported late payment can result in a noticeable drop, particularly if you previously had strong credit. Your credit report may now show the account as 30 days late, and if payments continue to be missed, that status can update in 30-day increments (for example, 60 days late, then 90 days late).

Even if you catch up later, the record of the missed payment can remain on your credit report for several years, potentially affecting future loan approvals, mortgage applications, and interest rates offered by lenders.

If your payment is 60 to 90 days late: Escalating collection efforts and deeper credit damage

If the loan remains unpaid for 60 to 90 days, collection efforts typically intensify. You may receive more frequent calls and formal written notices, and the lender may begin outlining the consequences of continued non-payment.

Interest continues to accumulate during this time, and additional late or administrative fees may be added to the balance, increasing the outstanding amount.

From a credit standpoint, multiple missed payments are more damaging than a single late payment. By this stage, your credit report may show consecutive delinquency markers, which can signal ongoing financial strain to future lenders.

If your payment is more than 90 days late: Default, collections, and possible legal action

After roughly 90 days without payment, the loan may be considered in default. At this point, the lender may transfer your account to its internal collections department or sell the debt to a third-party collection agency. If the debt is sent to collections, the collections account may appear separately on your credit report.

In some cases, particularly if the balance is substantial and remains unpaid, the lender or collection agency may pursue legal action to recover the debt. If a court judgment is obtained, enforcement measures such as wage garnishment or bank account seizure may be possible, depending on provincial laws. A collection agency cannot garnish wages without first obtaining a court order.

How not paying a personal loan affects your credit score

Not paying a personal loan can lower your credit score because payment history is the most important factor in Canadian credit scoring models. Lenders want to see a consistent track record of on-time payments. When a missed payment is reported, that pattern is interrupted.

Even one missed payment can cause a decline in your score, particularly if you previously had strong credit. If payments continue to be missed and the account becomes seriously delinquent or sent to collections, the impact can become more significant.

Accounts that go to collections can remain on your credit report for up to six years in most provinces. While the impact on your score typically lessens over time, the record does not disappear immediately after repayment.

How a lower credit score can affect you

A lower credit score can reduce your access to credit and increase the cost of borrowing. Lenders may be less likely to approve new loan or credit card applications, and if you are approved, you may be offered higher interest rates or lower credit limits.

Mortgage qualification can also be affected, as credit score plays an important role in determining eligibility and pricing. Even a slightly higher mortgage rate can significantly increase long-term borrowing costs.

If you want to understand more about how credit scores work and how they’re calculated in Canada, read our guide to how credit scores impact you.

Can a lender take legal action in Canada for missed loan payments?

Yes, a lender can pursue legal action if a personal loan remains unpaid. However, this is typically a later-stage step after repeated missed payments and collection efforts. Whether legal action is pursued often depends on factors such as the size of the debt, the borrower’s financial situation, and the likelihood of recovery.

If informal collection attempts are unsuccessful, the lender, or a collection agency acting on its behalf, may choose to file a lawsuit to recover the outstanding debt. If the court rules in the lender’s favour and issues a judgment, enforcement measures may be available. These can vary by province, but may include wage garnishment, freezing or seizing funds in a bank account, or placing a lien on certain property.

It’s important to note that these actions generally require a court order. A lender or collection agency cannot garnish wages or seize assets without first obtaining legal authorization.

Most personal loans in Canada are unsecured, meaning they are not backed by specific collateral. As a result, lenders must go through the legal system to enforce repayment. If the loan has a co-signer, that person may also be legally responsible for the debt. Secured loans differ because they are tied to an asset, and the lender may have the right to seize that asset under the terms of the agreement, subject to provincial rules.

What to do if you can’t pay back your personal loan

If you’re struggling to make personal loan payments, taking action early can reduce both financial and credit damage. The longer the account remains unpaid, the fewer options may be available. Even if you’ve already missed a payment, there are still steps you can take.

1. Contact your lender early

Reaching out to your lender as soon as you anticipate difficulty can make a meaningful difference. Many lenders have hardship policies in place, particularly if your financial situation has changed due to job loss, illness, or other unexpected circumstances.

You can ask whether the lender offers:

• Temporary payment deferrals
• Reduced payment arrangements
• Loan restructuring or term extensions

A deferral may allow you to pause payments for a short period, although interest typically continues to accrue. Restructuring the loan, such as extending the repayment term, may lower your monthly payment, but could increase the total interest paid over time.

Open communication does not guarantee approval, but it can prevent the account from escalating to collections as quickly.

2. Review your budget

If your loan payments feel unmanageable, reviewing your cash flow can help identify where adjustments are possible.

Start by separating essential expenses, such as housing, utilities, groceries, and transportation, from discretionary spending. Temporarily reducing non-essential expenses may free up funds to bring your loan current or prevent further missed payments. Even small changes can help stabilize your situation while you explore longer-term solutions.

3. Consider refinancing or consolidating debt

If high interest rates or multiple debts are contributing to the problem, refinancing or consolidating your debt may be worth exploring.

Refinancing your personal loan at a lower interest rate could reduce your overall borrowing cost. Extending the repayment term may lower your monthly payment, although it may increase the total interest paid over the life of the loan.

Debt consolidation combines multiple debts into a single loan, ideally at a lower rate. This can simplify repayment and reduce monthly obligations. Before committing, compare total costs carefully and ensure the new loan terms genuinely improve your situation rather than simply postponing the issue.

4. Speak to a licensed insolvency trustee

If your debt is unmanageable and you cannot realistically repay what you owe, a licensed insolvency trustee can explain formal debt relief options available in Canada.

These may include:

• A consumer proposal, which is a legally binding agreement to repay a portion of your debt over time
• Bankruptcy, which is generally considered a last resort

Both options have serious credit consequences, but they can provide legal protection from creditors and a structured path toward financial recovery.

The bottom line

If you can’t pay back a personal loan in Canada, the consequences typically escalate the longer the debt remains unpaid. Late fees and credit score damage can eventually lead to collections or legal action.

The earlier you address the issue, the more options you’re likely to have. Communicating with your lender, reviewing your finances, and exploring repayment or relief options can help limit long-term financial impact and support your path back to stability.

Also read:

• How to pay down credit card debt with a personal loan
• Secured vs. unsecured personal loans
• Personal loan vs. HELOC: What's right for you?
• Debt consolidation calculator