Punishment for Non-Payment of Personal Loan in India

Obtaining a personal loan is a significant financial responsibility. Before you apply for a personal loan, you must be fully aware of the consequences of not fulfilling this loan repayment commitment. Sometimes, certain defaults in personal loan payments can be avoided by the lender if disclosed beforehand. 

The first step towards avoiding falling deep into a loan non-repayment burden is to recognise when things are turning unfavourable. 

Continue reading below to find out the punishment and consequences for non-payment of a personal loan in India.

What Happens If a Personal Loan is Not Paid in India?

• The first step taken by the lender will be to send notifications and reminders to you through email and SMS.
• Then, they will provide you with some extension in tenure to repay your loan or the option of restructuring the loan to make your personal loan EMIs more affordable. 
• If you are still unable to make repayment in full, lenders are authorised to take legal action.
• You will be asked to pay penalties, and your assets may also be seized by the lender.
• You may also be required to submit a post-dated cheque (PDC) in favour of the lender for repayment. 

I Can't Pay My Personal Loan. What Should I Do?

• Stay calm and don’t panic. Stress will only make things worse. Collect yourself, assess your outstanding debt and make a repayment plan.
• Talk to your lender and explain the reason for the personal loan default. 
• Your lender may come up with some solutions, including giving you more time to pay off your loan, restructuring the loan, making a settlement, etc.
• You may consider refinancing your loan. This way, you may be able to lower your personal loan EMI. Refinancing is shifting your existing loan to another lender for a lower interest rate.
• Find ways to increase your income. Take up part-time jobs, freelancing projects or find other ways to help you secure more money. If this is not possible, look for ways to budget your existing expenses by cutting back on unnecessary expenses like unnecessary travel, salon visits, etc.
• Sell something valuable to pay off your credit. You can consider selling a gold jewellery, a piece of art, etc.

Legal Action Against Personal Loan Defaulters in India

In India, personal loan default is considered a breach of contract, and lenders have the legal right to take action against the defaulter. In case of non-payment, the lender can initiate legal proceedings against the borrower, which can lead to a civil lawsuit or a criminal case.

In case the lender files a civil lawsuit against you, the court may order you to pay the loan amount along with interest as well as penalties (if any). The court may also order the seizure of your assets or property for the outstanding loan amount recovery.

Under Section 420 of the Indian Penal Code (IPC), if the lender files a criminal case, the borrower may face imprisonment of up to two years. However, criminal proceedings are initiated only in cases of fraud or misappropriation of funds.

Consequences of Personal Loan Default for 10-year

• Your credit score may be reduced by 50-70 points.
• Your co-applicant/ co-signer/ guarantor will be asked to pay on your behalf.
• You can lose your assets that were pledged as collateral (if any).
• Your lender will levy additional fees/ late payment penalties/ default charges.
• Your personal loan interest rate will be increased for future payments.

FAQs

✅ Can I go to jail for not paying a personal loan?

In India, according to the personal loan rules and regulations, loan default doesn’t directly result in imprisonment. It is a civil offence that does not attract criminal charges. It means a defaulter will not go to jail.

✅ What happens after NPA?

After a loan turns into a Non-Performing Asset (NPA), several actions can be taken, such as legal proceedings, repossession of assets, and a potential impact on credit scores. Lenders typically initiate a recovery process by serving a notice to the borrower, followed by potential legal action on non-settlement of the loan within a specified period. The borrower may also be financially restricted and find difficulty obtaining new credit.

✅ What is IPC 420 for a personal loan?

IPC Section 420 for a personal loan states that cheating and dishonestly inducing the delivery of property is a criminal law provision in India that deals with cheating and deceit. In the personal loan context, it can be invoked if the personal loan borrower is found to have obtained the loan via fraudulent means, such as giving false information or misrepresenting his/her financial status. 

✅ Can police interfere with loan defaulters?

Usually, police do not interfere in most cases with loan defaulters in India unless there is a suspicion of fraud or criminal activity. Loan defaults are considered civil matters and not criminal ones. However, if a loan repayment cheque submitted by the borrower bounces, it may be considered a criminal offence under the Negotiable Instruments Act, 1881. In such cases, the police might be involved. 

✅ Can a loan recovery agent come to my home?

Yes, loan recovery agents are allowed to visit a borrower's house to recover the legitimate dues. However, these visits must be conducted in a civilised and ethical manner according to the RBI guidelines.

✅ What is the Supreme Court decision on loan recovery?

According to the Supreme Court, loan recovery must be done through legal means only and not through force or harassment by recovery agents. Lenders are vicariously liable for their agents’ actions. Non-compliance with RBI guidelines is grounds for complaint under the Banking Ombudsman Scheme. 

✅ Can a recovery agent track your phone?

While loan recovery agents cannot legally track your phone directly, they may use other tactics to locate you, such as accessing data from apps used for loan applications, utilising skip-trace tools, contacting your friends or relatives, etc. They may also misuse your data, potentially violating privacy laws. 

✅ What are the RBI guidelines for loan defaulters?

RBI guidelines for loan defaulters mention the procedures for managing defaults, protecting borrowers’ rights, and ensuring fair recovery practices. As per these guidelines, lenders must first try to negotiate a repayment plan, and if this fails, they can pursue legal action.