Repaying a loan taken out while unwell

If you took out a loan while you were unwell, and you are now wondering whether you have to pay it back, the answer turns on one question: did you have the mental capacity to understand what you were signing? If you did not, and the lender knew or should have known, you may not have to pay the money back¹. If you did have capacity at the time, the loan is still valid and you are liable for it, though the lender may agree to pause or reduce repayments if you are struggling.

Mental capacity means being able to understand and remember information about the loan, weigh up that information when deciding whether you want it, and let someone know what your decision is². If doctors think you lack mental capacity, you will not be able to make decisions about your finances³. That can affect everything from agreeing to repayments to withdrawing money from your bank account³.

The rules that protect you come from several places: the Mental Capacity Act 2005, the Consumer Credit Act 1974, and the lending rules the Financial Conduct Authority sets for firms. This page explains what happens to a loan taken out when you lacked capacity, when a lender cannot enforce the agreement, what lenders are expected to do about repayment, your options for asking the lender to review the loan, how to raise it with evidence, and where to get free help if the lender says no.

What happens to a loan if you lacked mental capacity when you took it out

When you lack mental capacity, you cannot make decisions about your finances³. That means you cannot agree to repayments, make benefit applications, or withdraw money from your bank account³. If a lender gave you a loan when you were in that state, the agreement may be unenforceable against you.

The law that governs this is the Mental Capacity Act 2005. Under the Act, a person lacks capacity if they cannot understand and remember information about the loan, weigh up that information when deciding whether they want the loan, and let someone know what their decision is². All three parts must be present for you to have capacity. If any one is missing, you may lack capacity for that decision.

The Consumer Credit Act 1974 also plays a part. Under section 78(6)(a), a creditor who fails to comply with certain requirements is not entitled to enforce the agreement while the default continues⁷. That provision is about documentation, not capacity directly, but it shows the principle: a lender that does not follow the rules cannot always enforce the debt.

If you took out a loan while you were unwell, the key question is what the lender knew. If you told them you had an illness, that is evidence they should have known about your lack of capacity¹. The lender then has a duty to consider whether you could afford the loan and whether you understood it.

When a lender cannot enforce the agreement

A lender cannot enforce a loan agreement if you lacked mental capacity at the time and the lender knew or should have known about it¹. The phrase "knew or should have known" is important. It is not enough that you lacked capacity in fact. The lender must have had reason to know.

What counts as reason to know? If you told them you had an illness, that is one indicator¹. If your behaviour at the time made your condition obvious, that could be another. If a carer or family member had already told the lender you were unwell, that would also count.

There is also the question of irresponsible lending. Irresponsible lending is when a lender gives credit to a borrower without checking if they can afford to pay it back⁸. If the lender did not carry out proper affordability checks, and you lacked capacity, that strengthens your case. You have the right to complain to your lender if they gave you credit irresponsibly and you are now struggling financially as a result⁸.

If the lender cannot enforce the agreement, the practical effect is that they cannot take you to court to recover the debt. They may still ask you to repay, but they cannot force you. If they have already taken enforcement action, you can raise capacity as a defence.

Repaying the money you borrowed: what lenders are expected to do

Even if a loan is unenforceable, you may still want to repay what you borrowed if you can. The law and the regulators expect lenders to treat borrowers fairly, especially those in vulnerable circumstances.

The Financial Conduct Authority's Consumer Credit sourcebook (CONC) requires a lender to have clear policies in place for customers who are in arrears and particularly vulnerable⁹. This includes customers who have "mental health difficulties"⁹. That means the lender must have a process for dealing with you if you are struggling because of your mental health.

If you are in arrears, the lender's first step should be to try to make a plan with you to recover the payments you missed¹⁰. They may agree to reduce or pause loan repayments, let you access savings early, offer you more credit, or look at your energy arrears¹¹. For mortgage arrears, lenders may reduce your payments for a set period, charge interest only for a while on a repayment mortgage, give a payment holiday, or extend the mortgage term to reduce payments¹². What they offer depends on your payment history and whether your difficulties are long or short term¹².

If you cannot afford the loan at all, the lender might reduce or write off the interest that has been added to the money you borrowed, and they will probably suspend your account¹³. That does not mean the debt disappears, but it can stop it growing.

If you have a guarantor loan, the guarantor is legally liable to pay back the loan if you fail to make payments¹⁴. That is a separate legal obligation, and it applies even if you lacked capacity, unless the guarantor agreement itself is unenforceable.

Your options: asking the lender to review the loan, pausing or reducing repayments

If you are struggling to repay a loan taken out while you were unwell, you have several options. The right one depends on your circumstances and what the lender is willing to do.

Ask the lender to review the loan. You can ask the lender to look again at whether they should have lent to you. If they agree that you lacked capacity and they should have known, they may write off the debt or reduce it. You have the right to complain to your lender if they gave you credit irresponsibly⁸.

Ask for a payment holiday or reduced payments. Lenders may agree to reduce or pause loan repayments¹¹. For priority debts like mortgages, you might be able to make lower payments for a short period, ask to pay less for a while longer based on what you can afford, or ask for a payment holiday if you cannot afford anything at all¹⁵.

Apply for a mental health crisis moratorium. This is a formal protection that stops creditors from taking enforcement action while you are in crisis treatment. To be eligible, you must be unable, or unlikely to be able, to repay some or all of your debt as it falls due, a moratorium must be appropriate, and an approved mental health professional must provide evidence of mental health crisis treatment⁴. The application can be submitted by the debtor, the debtor's carer, an approved mental health professional, a care co-ordinator, a mental health nurse, a social worker, an independent mental health advocate, an independent mental capacity advocate, a relevant person's representative, an approved mental capacity professional, or an appropriate person⁵.

Consider a debt management plan or consolidation. A debt consolidation loan combines your debts into one payment, but repayment terms are not flexible if you cannot afford them anymore¹⁶. If you are struggling, free debt advice is usually a better first step than borrowing more.

How to raise it with the lender and what evidence helps

When you contact the lender, you need to explain what happened and provide evidence. The stronger your evidence, the more likely the lender is to take your case seriously.

Medical evidence. If your arrears arose because of illness or a medical condition which may prevent you from working or making payments for a period of time, bring a letter from your GP, consultant or medical social worker explaining your condition or health conditions¹⁷. This is the most direct evidence of your state at the time you took out the loan.

A Debt and Mental Health evidence form. You can ask a health or social care professional to complete a Debt and Mental Health evidence form which you can then forward to creditors as evidence of your condition¹⁸. This is a standard form that creditors recognise.

Proof of what you told the lender. If you told the lender about your illness at the time, gather any evidence of that: emails, call logs, notes from appointments. The fact that you told them you had an illness is evidence they should have known about your lack of capacity¹.

A letter from someone who supported you. If a carer, family member or friend helped you at the time, they can write a letter explaining what they observed. This is not formal medical evidence, but it can support your case.

When you write to the lender, keep a copy of everything. If you are asking for a decision to be looked at again, write to the lender using the contact details on your decision letter and ask them to look at the decision again, explaining in detail why you think the decision is wrong including any relevant dates, send the letter recorded delivery and keep a copy¹⁹. That guidance is about benefit decisions, but the same principle applies to lenders: put it in writing, be specific, and keep records.

If the lender says no: complaints and where to get free help

If the lender refuses to review the loan or rejects your complaint, you can take it further.

Complain to the Financial Ombudsman Service. The Financial Ombudsman Service can help if you are bringing a complaint on behalf of someone who has died or does not have mental capacity²⁰. If you still have mental capacity and agree to their declaration, you can bring the complaint yourself or give someone permission to act on your behalf²¹. The ombudsman can consider complaints made out of time if there were exceptional circumstances, for example if the customer was incapacitated⁶.

Get free debt advice. StepChange, National Debtline and Citizens Advice all offer free, impartial debt advice. They can help you negotiate with the lender and explain your options. If you have a mental health crisis moratorium, a debt advice provider will process your application⁵.

Check if you can get help with priority debts first. If you are behind on rent, mortgage, energy or council tax, those are priority debts. You might be able to make lower payments for a short period if money is tight¹⁵. Dealing with priority debts first protects your home and essential services.

Consider whether the debt can be written off. Getting a debt written off will have a negative impact on your credit reference file and may affect your ability to obtain credit for up to six years¹⁸. But if the debt is unenforceable because you lacked capacity, writing it off may be the right outcome.

How a mental health crisis moratorium works

A mental health crisis moratorium is a formal protection that stops creditors from taking enforcement action against you while you are receiving crisis treatment. It is part of the Debt Respite Scheme (Breathing Space) regulations.

To be eligible, three conditions must be met: you must be unable, or unlikely to be able, to repay some or all of your debt as it falls due; a moratorium must be appropriate; and an approved mental health professional must provide evidence of mental health crisis treatment⁴. The application can be submitted by a range of people, including the debtor, the debtor's carer, an approved mental health professional, a care co-ordinator, a mental health nurse, a social worker, an independent mental health advocate, an independent mental capacity advocate, a relevant person's representative, an approved mental capacity professional, or an appropriate person⁵.

While a moratorium is in place, the court will only allow a creditor to take enforcement action if it thinks it is reasonable, does not think it will be harmful or damaging to you, and it does not take away too much of the breathing space protection²². That is a high bar, and it means most enforcement action is paused.

A moratorium does not write off your debt. It pauses enforcement while you get treatment. When the moratorium ends, you will need to deal with the debt, but you may be in a better position to negotiate.

Will challenging the loan affect my credit file?

Your credit file will be affected any time you pay less than what you agreed to when you took out the debt¹³. If you ask for a payment holiday or reduced payments, that will show on your credit file. If you stop paying altogether, your credit file will show that you did not make your agreed payments, which impacts your credit score²³.

If the debt is written off, that also has a credit file impact. Getting a debt written off will have a negative impact on your credit reference file and may affect your ability to obtain credit for up to six years¹⁸.

The credit file effect is temporary. A default stays on your file for six years, but after that it drops off.

If you are worried about your credit file, you can ask the lender to record the debt as in dispute while your complaint is investigated. That does not remove the impact, but it notes that the debt is contested.