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Applying for a personal loan can help individuals (especially salaried people in India) achieve bigger things in life with the much-required financial assistance. However, in a land like India, borrowers face many consequences with a default on a instant personal loan. As a salaried individual meeting financial challenges, enjoying a debt-free life can only be possible once you understand the repayment strategies.
Defaulting on personal loan payments may have serious consequences that drastically impact your financial well-being and credit score. Defaults in India are a significant concern, and borrowers may have to face legal consequences with a loan default.
While you borrow money with the intention to pay it back on time, there are times when things don’t go according to your plan. As a result, a mere loan default can change your life forever. However, the consequences of repayment failure may vary from one individual to another, especially when a personal loan is involved.
A loan in default is a circumstance when you fail to make your payments for 30-90 days. It depends on the terms of the lenders. The loan gets classified as a delinquent account before it reaches the default status as per the personal loan defaulter law. That means the repayment is failed by the due date.
Also Read: Urgent Loan for CIBIL Defaulters
The process lenders follow after a personal loan default in India usually moves in stages, giving borrowers opportunities to respond before severe action is taken:
1. Notification issued – Lenders typically issue reminders after one or two missed payments. Borrowers may receive calls, messages, or written notices urging repayment. If ignored, a formal default notice may follow.
2. Negotiation offered – If repayment difficulties are genuine, lenders may open discussions to adjust EMI amounts or grant temporary relief. Borrowers should respond quickly since failure to negotiate may escalate the matter.
3. Post-dated cheques submission – In cases where notices are ignored, lenders may attempt to encash post-dated cheques provided earlier. As per RBI and the Negotiable Instruments Act, 1881, dishonoured cheques can result in criminal charges.
4. Consequences of default – If no resolution is achieved, the borrower is labelled a personal loan defaulter. Personal loans are unsecured. So, it may result in placing you on the defaulter’s list. This negatively impacts your credit history as well as your borrowing potential.
When it comes to immediate financial assistance, a personal loan comes as a blessing in disguise. From offering immediate funds for emergencies to reducing your financial burden, this type of loan can help an individual manage finances effectively.
The consequences of a default on a personal loan are huge. Amidst the legal complications and penalty charges associated with loan defaulters, the following are the consequences a borrower may experience with loan default.
The most significant consequence of a personal loan default is the impact on your credit score. Credit bureaus keep records of individual credit behaviour, such as the history of loan repayment. So, defaulting on a loan means the credit bureaus will report it. As a result, it damages your credit score. Usually, the CIBIL score ranges between 300 and 900. The calculation occurs on the basis of these parameters i.e. credit history, payment behaviour & credit utilization ratio.
So, with a low credit score, the borrower may face difficulties obtaining future loans or credit cards. A lender or lending institute uses your credit score to determine your creditworthiness. That means a poor score results in the rejection of your future loan applications. Alternatively, it may result in an approved loan with a higher personal loan interest rate.
Besides, the defaulted loan remains on the credit score for a longer period of time. This serves as a warning sign for prospective creditors and lenders for future loan or credit card applications.
| Range | Rating (What it Means) |
|---|---|
| 300 to 550 | Indicates a Poor Rating |
| 551 to 650 | Suggests a Fair Rating |
| 651 to 750 | A Good Rate |
| Above 750 | An Excellent Rate |
After you miss the second or third payment, your lender may issue a notification. A few lending institutes’ agents call or message you on the registered telephone number to ask for the payment. If the payment is still not clear from your end, the lender may issue the default notice document.
After a lender initiates this type of process, a borrower is bound to solve the problem by contacting them. For a genuine defaulter, the lender may consider the reason for defaulting. As a result, the EMIs might be reduced or stopped for the time being. After a certain point in time, you need to initiate the repayment as mentioned in your contract.
If you don’t contact them after their notice, the lender might take further steps to ensure the repayment is made on your end. As a result, they sent a notice mentioning that the post-dated cheque was resent to your bank on a specific date. It also mentions that the borrower must have enough balance in the account for the cheque to go through.
So, if you don’t have enough money in your account on the date when the lender sends the post-dated cheque, you may face legal consequences. A few legal consequences that you may face include the following i.e. lenders may file a case in the civil court for repayment & a defaulter may experience wage garnishment.
Note that a wage garnishment is the official notice or court order that directs the employer to collect money to fulfil debts (or financial obligations). Here, payroll deductions are considered.
Failing to pay the personal loan on time is a breach of contract. So, in times of a default on a personal loan, a lender may take legal action against that individual. If the lender initiates legal proceedings, it may result in a criminal case.
According to RBI, genuine defaulters shouldn’t be hassled. They must be given a certain period of time for recovery. Moreover, it states that customers shouldn’t experience undue harassment by lenders.
However, once the lender files a civil lawsuit against that individual, the court may order them to pay the amount alongside interest.
One can explore negotiation and other settlement options with the lending institute. Someone who wants to opt for settlement options may have to experience impacts on the credit score. A settlement can dramatically affect your future loan procedures.
Any unsettled default may bring more challenging scenarios for the borrowers. As a result, the borrower may experience imprisonment under section 420 of the Indian Penal Code.
In extreme cases, a lender might initiate bankruptcy proceedings against the borrower. So, in such circumstances, a borrower who is unable to repay the personal loan amount through EMI can file for bankruptcy. The first thing that the borrower has to do is file a petition for bankruptcy with NCLT (or National Company Law Tribunal. An insolvency consultant will then oversee the proceedings.
While a personal loan can be used to meet emergency financial needs, a loan default may bring additional charges and penalties. Penalties on default are charged when the individual who opted for short term loans or long term loans fail to repay the amount in the way stated in the contract. If the person fails to pay monthly EMIs in a timely manner, the bank or financial institute may impose a penalty as a late payment charge.
A few lenders may also increase the interest rate on the remaining loan balance in case of default. Some financial institutes may charge a default interest when you fail to make monthly repayments. This amount is added to the outstanding balance of the loan amount after a default on a personal loan. The above penalties and additional charges may make it more challenging for the borrower to make repayments in a timely manner. As a result, it may result in further defaults over time.
Debt can impact negatively on your mental health. That’s why the rate of people suffering from debt-stress syndrome in India is exponentially growing. The constant pressure of managing lender’s calls and legal notices may take a toll on you emotionally. Financial strain and the inability to pay monthly EMIs on time may impact your life.
Your lender can take action when you fail to repay the loan on time. The process begins with notices & negotiations.
The following consequences may arise if a personal loan defaulter do not clear your repayments:
1. Civil lawsuit: Lenders will approach a civil court for repayment.
2. Asset seizure or wage garnishment: The court will allow the lender to recover money by deducting directly from wages or seizing assets.
3. Negotiation before legal action: You will get a chance to negotiate or settle the loan amount before your case escalates.
4. Impact on credit history: Default reflects on the borrower’s credit report, lowering the credit score and reducing future chances of getting loans.
5. Criminal charges: Certain cases involve fraudulent intent. In such cases, you will be charged under the Indian Penal Code’s Section 420. This may result in imprisonment.
Defaulting impacts drastically on your future loan approvals. It also results in personal loan default India legal actions.
Here are the RBI guidelines for personal loan defaulters-
1. RBI mandates fair practices in debt recovery for personal loans.
2. Lenders must strictly follow RBI guidelines in all loan default cases.
3. Borrowers are entitled to receive prior notice before any recovery action is taken.
4. All communication must be respectful without harassment or threats.
5. Recovery agents are bound by the RBI’s Code of Conduct. This ensures ethical as well as transparent practices.
Also Read: RBI Guidelines for Loan Recovery
A loan default reflects on your financial health by impacting your credit score. So, whether it’s a sudden job loss, medical emergency, or accident, a default on your personal loan needs to be handled effectively. On that note, the following presents the top tips you can implement to manage and overcome the financial challenges resulting from a default.
1. As soon as the situation results in a default, you should consult your lender immediately.
2. It’s better to restructure than loan than to wait for the lender to send you notice (you may communicate with the lender to change your tenor and EMI amount accordingly).
3. Learn about a deferring payment option to get temporary financial relief (when the interest is not charged).
4. Discover whether your lender offers an EMI holiday during periods of financial hardship (you can use it during unemployment, unforeseen accident, or medical emergencies).
One quick note: During this period, a borrower does not need to make loan repayments, though the interest will accrue on the balance.
A personal loan default can impact your credit score. Besides the legal consequences, it may impose penalties and financial and mental harassment. Lenders may take legal action by reporting it to the credit bureaus. This results in reduced credit ratings. So, a borrower should think strategically to ensure minimum hassles during crucial times.
You may plan to negotiate with the lender and seek an appropriate settlement. You may also consider consolidating the debt by paying off different debts with a new loan or balance transfer credit card. This comes with a lower interest rate. Whatever the situation is, you must consider one of these choices to ensure the loan amount is paid strategically. Now that you understand the repercussions of a default on a personal loan, how do you want to make a choice? Select the right steps to reduce the chances of future debts. Seek a customized loan deal from a lender that can suit your repayment potential and meet your financial requirements accordingly.
A legal notice is the formal communication that your lender sends to the personal loan defaulter in case of a default. It’s a warning regarding pending dues. It demands immediate repayment. In short, the notice is a final reminder before legal proceedings. This offers you a chance to settle your loan.
Defaulting on a personal loan may impact your credit score by lowering it. Missed payments will be reported to credit bureaus. That makes it difficult to secure future loans or credit cards. A single default can harm financial credibility. It reduces trustworthiness in the eyes of your lender.
Recovery of unpaid personal loans in India must follow the RBI guidelines. Your lender should issue a proper notice before initiating recovery. Communication must remain respectful without harassment. Recovery agents need to adhere to the RBI’s Code of Conduct. This ensures you do not get threat calls regarding the repayment or recovery process.
Failing to repay a personal loan is a civil matter. However, jail time might apply when criminal charges such as cheque bouncing or fraud is proven under Section 138 of the Negotiable Instruments Act or fraud under Section 420 of the Indian Penal Code, respectively. Imprisonment is otherwise not imposed.
Failing to repay a personal loan results in multiple consequences, including legal notices, recovery actions and seizure of assets in certain cases. Your credit score drops drastically. This affects your eligibility for future loans. Persistent default may result in civil lawsuits, wage garnishment & long-term financial instability because of the damaged financial credibility.
Police do not have any role in civil loan defaults. These are contractual matters between lenders & borrowers. However, your lender may file criminal complaints if fraud, misrepresentation, or cheque bounce cases are involved. This results in the involvement of the police.
A borrower struggling with repayment may explore settlement options like negotiating with lenders for reduced EMIs, restructuring the loan tenure or opting for a one-time settlement. Banks may agree to waive penalties or reduce outstanding dues when approached proactively. Communicate with your lender early, as this helps avoid legal or financial distress.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
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