What Happens When You Fail to Repay a Personal Loan?

Updated on: 14 Dec 2021 // 25 min read // Personal Loans
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A majority of people borrow a Personal Loan to meet any short-term or urgent financial requirement. At the same time, the constant worry ‘what will happen if I fail to repay’ is something that bothers a lot of people against it.

Nevertheless, market landscape and customer borrowing trends prove that Personal Loans are one of the best loan products to bridge financial gaps in life. With high-value credit availability for people with good credit rating, repayment flexibility, and attractive interest rates, the decision to Apply for a Personal Loan comes instantly to most individuals.

However, the worry of not meeting the repayments of EMIs on time is a valid one. Here is a detailed guide to help you understand the pitfalls of failure in meeting the Personal Loan EMI schedule. Let’s find out how to better manage your loan efficiently.

What happens when you fail to repay an EMI?

First, you must understand what exactly constitutes a loan default. Failure to repay a single EMI is not termed as a default. Though it is a serious matter and requires immediate attention. Usually, the lenders give you time till the end of the month to repay the outstanding EMI, along with the penal charges and interest. If you make the payment by the end of the month, the matter is closed, and the lender will not report it to CIBIL.

Types of Personal Loan

On the contrary, if you fail to make the payment by the end of the month, the matter will be reported to the CIBIL. Herein, your Credit Score will take a big hit. So, you must always try to repay the overdue amount as soon as possible and get rid of monthly obligations in time.

What happens when you default on your Personal Loan?

A Personal loan account is declared as default when it turns into an NPA (Non-Performing Asset). Any loan is classified as an NPA only when three consecutive EMIs have not been paid. The lender will initiate the proceedings to recover the dues. Though, it should be noted that if you default for two consecutive months but repay the amount before the third EMI, you will not be termed as a defaulter.

The process followed by lenders in case of Personal Loan default are:

Calls from the recovery department: You will be receiving a lot of calls from the recovery department of the lending institution. The representative will be asking you to pay the money to avoid any hassles that are related to the recovery process.

Visit from recovery agents: Every financial institution has a recovery department that handles the responsibility of recovering dues from defaulting clients. These agents will call upon you at your home or your place, asking you to repay the money as soon as possible.

Legal notice: When you avail of a Personal Loan, you have to offer blank cheques as a security to the loan amount. Now that you are unable to repay the loan amount, the lender will present your cheques in the bank. If the cheques are dishonoured due to insufficient balance, the legal department of the lender will send you a legal notice to repay the outstanding amount with costs within 15 days.

Court case: If you are still unable to repay the loan amount, the lender will file a court case against you to recover the money. You will need to hire a lawyer to represent you in court. The only options for you will be to either pay the amount in full or enter an out of court settlement with the lender.

Your rights

Though the lenders have all the right to recover their money, they can not do it forcefully. There are certain rights that you have, and these are the ones which you should always remember:

  • Right to adequate notice: After the account has been classified as an NPA, the lender must issue you a 60-day notice, asking to return the money within the next 30 days before initiating any legal proceedings.
  • Right to humane treatment: There are certain guidelines that the recovery agents must follow:
  • Visit only between 7 AM to 7 PM.
  • No threat through verbal or physical actions.
  • They have to behave decently at all times.
  • The borrower can challenge any attempt to humiliate. They can register a police complaint and start an action against the recovery agents.

Implications of a default

The implications of defaulting on a Personal Loan are quite severe, and you must take notice of them.

  • Your CIBIL score will take a severe hit and will be reduced by several points.
  • You will have to pay heavy penalty charges and penal interest on the overdue amount.
  • You will be ineligible for a loan in the future until the default is corrected.

How to avoid a Personal Loan default

To prevent the situation of a Personal Loan default, it is essential to understand the reasons that can lead to a default and how to avoid them:

  • Avail an amount that you can afford: Borrow only as much amount as you can afford to repay. For instance, you can get an IDFC First Personal Loan up to Rs. 25 Lakhs, but you should apply for only as much amount as you really need.
  • Compare the interest rates: Do not accept the first Personal Loan offer that you get, always remember to negotiate the interest rate with the lender to get the best deal.
  • Choose your repayment tenor carefully: You must choose a repayment tenor that offers you an EMI amount that you can easily repay. For instance, when you avail of a Federal Bank Personal Loan, you can opt for a repayment tenor of up to 48 months, thereby allowing you the flexibility to choose the ideal repayment tenor.
  • Control your expenses: You must remember to stay within your means,e., control your costs and do not borrow to splurge on unnecessary things.

All in all, you must always exercise financial discipline and manage your finances carefully to ensure timely repayment of your loans.

Also Read: Loan on Aadhaar Card – Impact of Aadhaar Card on Personal Loan

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