When it comes to borrowing money, a personal loan is one of the most affordable options right now. After all, the high-rate environment has increased the cost of nearly every borrowing option — and while the average rate on a personal loan (about 12.4%) isn’t ideal, it’s certainly more appealing than the average credit card rate, which is nearly twice as high.

But while taking out a personal loan can be a helpful (and somewhat affordable) financial tool in today’s economic environment, circumstances may arise that make it difficult to keep up with payments. Any major hardship you face, whether it’s an illness, injury or job loss, can have a big impact on your income. And when coupled with today’s economic issues, like higher-than-ideal inflation, it can be a recipe for financial disaster.

There are options to consider in these types of situations, though. For example, if you’ve borrowed money in the past and now find yourself struggling to repay your personal loan, one of the solutions outlined below may help you avoid defaulting on your repayment obligations. 

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Can’t pay back your personal loan? 5 options to consider

Here are a few different approaches to consider if you can’t pay back your personal loan:

Contact your lender right away

As soon as you think you may have trouble making payments, reach out to your lender, as many will offer hardship programs or be willing to work with borrowers who are experiencing temporary financial difficulties. The potential outcomes from contacting your lender could include:

• Temporary payment deferment
• Reduced interest rate
• Extended loan term to lower monthly payments
• Waived late fees

Lenders generally prefer to work with borrowers rather than deal with defaults or collections, so don’t wait until the issue compounds. Be honest about your situation and be prepared to provide documentation of your financial hardship if required.

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Try to refinance your loan

If your credit score has improved since you originally took out the loan, or if market interest rates have dropped, refinancing could be a viable option to make your loan more affordable. When you refinance your personal loan, you take out a new loan that pays off your existing one, ideally with better terms such as a lower interest rate or longer repayment period.

However, you should be cautious of extending your loan term significantly, as this could result in paying more interest in the long run. And be sure to do the math on any prepayment penalties on your current loan or origination fees on the new loan to ensure it makes sense financially.

Consolidate your debt

If you’re struggling with multiple debts, including your personal loan, debt consolidation might be worth exploring. This involves combining several debts into a single loan. The goal is to simplify your payments and potentially secure a lower overall interest rate. Debt consolidation options include:

While consolidation can be an effective strategy, you’ll typically need a good credit score and borrower profile to qualify (especially for a loan with a lower rate). So be sure to consider this option before falling behind on your payments, or you may have trouble getting approved.

Enroll in a debt management plan

Credit counseling agencies and some debt relief companies offer programs that can help you develop a debt management plan. When you enroll in this type of program, a credit counselor reviews your finances, helps you create a budget and potentially negotiates with creditors to get better repayment terms on your behalf. Through a debt management plan, you may be able to:

• Lower your interest rates
• Have certain fees waived
• Create a structured repayment plan

If you’re going to pursue this option, just be sure to do your homework and choose a reputable debt relief company or credit counseling agency to get the most out of it.

Negotiate a settlement

If you’re unable to repay your loan through other options, you may be able to negotiate a settlement with your lender. This involves offering a lump sum that’s less than the full amount owed to settle the debt. 

While you can try to negotiate with your creditors on your own, many debt relief companies offer debt settlement services. The benefit of working with a debt relief agency is that their experts are skilled in these types of negotiations, so it could lead to better outcomes. 

In some cases, you may be able to reduce the total amount you owe by as much as 20% to 50% (or perhaps even more). That said, debt settlement can also have serious consequences, including credit score damage and tax liabilities.

The bottom line

Falling behind on personal loan payments can be stressful, but there are multiple strategies available to help you regain control of your finances. If you’re going to take action, though, you need to act quickly and communicate openly with your lender. And, as you work through this challenge, take the opportunity to thoroughly review your finances and develop better financial habits to prevent similar issues in the future.