Personal loans are unsecured loans that are provided without any restrictions on the end-use. In recent years the demand for personal loans has increased drastically owing to the ease with which the personal loans are issued. Just because it is easily available and with a quick turnaround time, you should not get tempted and apply for one without thinking twice. You should consider your affordability and borrow only if the loan is necessary.
If you do not plan your finances and borrow erratically, there is a good chance that you will end up in a financial mess that will lead to defaults in repayment. Read on to understand the repercussions and punishment for non-payment of personal loans.
After meeting Personal Loan Eligibility Criteria and submitting the loan documents, you commit to repay the loan within the tenure that you have opted for in equated monthly instalments (EMI). It means that you will have to pay a fixed amount on the set date every month. If you have not planned your finances meticulously or if you are unable to pay the personal EMI due to unavoidable circumstances, you will have to bear the brunt of the punishment for non-payment of personal loans.
The personal loan will be classified as a non-performing asset if the borrower defaults beyond 90 days. If the loan is not repaid even after 180 days, the lender has the right to proceed legally against the borrower under Section 138 of the Negotiable Instruments Act 1881. Before proceeding legally, the lender will exercise all recovery measures like sending two reminders followed by a recall letter. The recall letter will be the final reminder wherein it will be specifically mentioned that the lender will proceed legally if the dues are not cleared within a specific date.
If the borrower appeals to the lender and gives valid reasons for the non-repayment, then the lender may provide options like restructuring of the loan. The restructure will make it convenient for the borrower to repay the dues.
On the other hand, if the borrower has diverted the funds and is wilfully avoiding the repayment of the loan or if the collateral is sold (in the case of secured personal loans) without the knowledge of the lender, then a criminal case will be lodged against the borrower as a punishment for non-payment of personal loan.
Though the lender has the right to take legal action against defaulting borrowers, there are certain rights that borrowers are eligible for.
It is recommended not to let the situation go to the extent of legal action. The penalty for delayed payment followed by legal fees could really pinch your pocket.
Loans, where security like gold, property, LIC policies, NSCs etc. is offered, are called secured loans. The punishment for non-repayment of personal loans that are secured by way of mortgage of property or pledge of jewellery, LICP or NSCs is quite different. The initial recovery steps, like sending reminders, are similar to unsecured loans. When the borrower fails to respond to such reminders, the lender will send a notice to the borrower regarding the sale of the asset along with the date of auction.
In the case of a mortgage of a property, after the loan is classified as Non-Performing Asset, a notice under the SARFAESI Act will be sent with sufficient time to repay the dues within the legal framework. If unpaid within the time permitted, the next step would be sending a notice stating that the property will be auctioned on a certain date. The reserve value set for the auction will also be mentioned. The time gap between the date of the notice and the date of the auction will be one month. If the borrower clears the dues within this time, the auction will be called off.
In case the asset is sold, the borrower will have the right to claim the residual value out of the sale proceeds after the entire dues have been paid off.
The lender will keep the credit bureau informed regarding the repayment behaviour of individual borrowers. Every EMI that is missed will be recorded in the credit history of the borrower. There will be a dip in the credit score by 50 to 70 points each time. If the default continues consecutively for three months, the personal loan will be classified as a Non-Performing Asset, and the same will be reported to the credit bureau. This will have a drastic effect on the credit score and to the extent that it may become difficult for you to procure further loans. It will negate your chances of availing of big-ticket loans like home loans.
It is therefore recommended to plan your finances prudently and borrow only if you need to and if you can afford it.
Missing Personal Loan EMI payments have the following consequences. This is in addition to the punishment for non-payment of personal loan.
Non-payment of personal loans could be due to unforeseen circumstances like a temporary layoff, medical emergencies, loss in the business, etc. It can also be due to unplanned financial commitments. There are several tactful ways of avoiding the default of personal loans.
Availing a personal loan is a financial commitment that has to be honoured seamlessly. Planning the monthly budget to provide for the additional burden in the form of a personal loan EMI for tenure as long as 60 months is highly essential to avoid missing or delaying the EMI and save yourself from the punishment for non-repayment of personal loan.