When you take a personal loan from a lender, you make a legal commitment to repay the loan as agreed. Although you have every intention of repaying the loan, your plan may not go according to your schedule. Life happens, and you may miss one payment, then another, and before you know it, you have earned a title of a personal loan defaulter. So, what happens when you default? It’s important to know how a personal loan default affects you, your credit health and your life.

What is personal loan EMI default, and who is a loan defaulter?

Missing one EMI payment doesn’t make you a defaulter. When you fail to pay several EMIs on time, your lender reports you as a defaulter. Some lenders may offer a grace period after the payment date during which you can make the payment; however, a late fee will be charged, but you won’t earn the title of a defaulted.

What happens when you default on your personal loan?

There are major consequences for defaulting on a personal loan:

1. Your credit score is affected

   All banks and NBFCs report missed payments to the credit bureaus, such as the CIBIL and Equifax. This lowers your CIBIL score drastically. Low credit score makes it hard for you to get any form of credit/loans in the future.

2. Your co-signer or guarantor is impacted

   If you had a co-signer linked to the personal loan, the missed payments affect their credit score too. Also, they will receive calls from the lender and the recovery agents in an attempt to recover the loan amount.

3. Your financial burden grows

   Late fees, penalties, legal costs, etc. add up to the outstanding loan balance making the total much higher than what you owe.

4. Banks and NBFCs may take a legal action

   If the banks and NBFCs fail to recover the loan amount from you, they may resort to the legal path to recover the money.

What to do if you default on your personal loan?

If you have defaulted on a loan, take a few steps to tackle the situation:

1. Don’t panic

   Keep a calm mind and figure out the reason you were unable to make the payment. Then, figure out a solution to avoid this situation from reoccurring.

2. Talk to your lender

   Don’t underestimate the power of communication. Explain the reason for the default to your lender. Your lender may come up with a solution that benefits you both.

   • You may ask your lender for more time to make the repayment
   • You can request your lender to restructure the personal loan – increase the loan tenure and decreases the EMI.
   • In the worst case, you can request the bank for a settlement.

3. Consider refinancing

   Through refinancing, you may be able to reduce your EMI amount. However, you need to have a good credit score for refinancing your loan.

4. Increase your income or cut back expenses

   Take up short-term jobs or freelance projects to earn more money. If that’s not an option, then consider budgeting your monthly expenses.

5. Know the rights of defaulters

   If you are defaulter, wilful or genuine, you have certain rights. The banks and financial institutions are governed by the RBI. They are committed to best practices as a part of the code of commitment to their customers. So, as per law, the banks or the recovery agents appointed by the banks cannot threaten or manhandle you. Read more about the rights of loan defaulter here.

   A personal loan is an unsecured loan and is given to you based on your repayment ability. Therefore, it is your responsibility to repay the loan as agreed. Ignoring this responsibility can have negative consequences to your credit health and financial life.

Frequently Asked Questions

1. I can’t pay my personal loan. What should I do?

   You can ask your loan provider to Increase the loan tenure to make your EMIs easy to repay or ask them if they can convert the loan to a secured loan where you have to provide some collateral.

2. What happens if personal loan is not paid in India?

   The banks/financial institutions will give you enough time to repay the loan amount and other miscellaneous charges. The loan you take will be classified as NPA, and the borrower will be sent a notice from the bank/ institution to repay the amount.

3. Can I go to jail for not paying a personal loan in India?

   You won’t be termed a criminal just because you defaulted on a loan. There are legal ways in which banks & financial institutions will approach for recovery of the loan. As a borrower, you also have some rights to protect yourself.

4. What happens if car loan is not paid in India?

   The banking/financial institution will send you a notice to repay the due amount. If it is not repaid in the prescribed period, your car will be repossessed as per the agreement.