What Happens When You Default on a Personal Loan in India?
What Happens When You Default on a Personal Loan in India?
Mar 22, 2024
15 Mins
Introduction:
In India, borrowers who fail to repay personal loans face a range of negative consequences. From increased debt burden to damaged credit scores and potential legal action, defaulting on loan repayments can have lasting impacts. In this article, we explore the various repercussions borrowers may encounter when they find themselves unable to make timely payments.
Higher Debt Burden:
When borrowers default on their Equated Monthly Installment (EMI) payments, it not only increases their liabilities but also places a heavier burden on their finances. Lenders may require borrowers to pay the entire outstanding amount, including penalties, within the remaining loan tenure. This added financial strain can be challenging to manage.
Credit Score Damage:
A good credit score is crucial for obtaining future loans easily. Unfortunately, defaulting on EMI payments can significantly decrease one's credit score, leading to difficulties in securing loans down the line. A drop of 50-70 points can greatly impact an individual's borrowing capacity.
Legal Action:
The extent of legal action taken by lenders depends on multiple factors, such as the duration of EMI defaults. While lenders may take a lenient approach for one or two missed payments, they have the option to pursue legal action if defaults last for more than 180 days. Under the Negotiable Instruments Act of 1881, lenders are entitled to file cases against defaulting borrowers in court. Additionally, if a borrower is identified as a wilful defaulter, criminal charges can be pressed under relevant sections of the Indian Penal Code.
Difficulty in Obtaining New Loans:
Banks record EMI defaults in credit reports, making it challenging for individuals to secure new loans. If defaults are not rectified within a specified timeframe, lenders may report the credit status as "written-off" to credit bureaus, damaging the borrower's credit history. This negative record further hampers their chances of obtaining future loans.
Borrower Rights and Protections:
Borrowers have certain rights and protections when it comes to loan agreements. These include the right to receive proper notice before any recovery proceedings commence, the right to decide the terms of contact with the bank, the right to be treated with civility and privacy, as well as the right to fair value assessment in case of asset repossession. It is crucial for borrowers to be aware of these rights to prevent any exploitation during the recovery process.
Steps to Take When Facing Default:
Should a borrower find themselves in a default situation, it is essential to take proactive steps to rectify the issue. These steps may include creating a budget, informing the lender about the situation, requesting deferment of EMI payments, seeking tenure extension or interest payment flexibility, considering asset liquidation, seeking support from family and friends, negotiating loan settlement terms, or understanding the implications of defaulting on secured loans.
Impact on Credit Score:
Defaulting on loan repayments and allowing the borrowed amount to turn into a non-performing asset adversely affects one's credit history. Lenders report such cases to credit bureaus, resulting in a significant drop in credit scores.
Conclusion:
With delinquency levels on the rise in India, it is crucial for borrowers to ensure they are financially capable of repaying loans before entering into any agreement. In emergencies where loan payments cannot be made on time, it is vital to inform lenders in advance to explore alternative solutions. Additionally, choosing a lender that offers flexible and affordable repayment terms can play a crucial role in avoiding default situations. Researching loan options, such as those available through the MoneyView website or app, can provide borrowers with hassle-free loans at reasonable interest rates.
Introduction:
In India, borrowers who fail to repay personal loans face a range of negative consequences. From increased debt burden to damaged credit scores and potential legal action, defaulting on loan repayments can have lasting impacts. In this article, we explore the various repercussions borrowers may encounter when they find themselves unable to make timely payments.
Higher Debt Burden:
When borrowers default on their Equated Monthly Installment (EMI) payments, it not only increases their liabilities but also places a heavier burden on their finances. Lenders may require borrowers to pay the entire outstanding amount, including penalties, within the remaining loan tenure. This added financial strain can be challenging to manage.
Credit Score Damage:
A good credit score is crucial for obtaining future loans easily. Unfortunately, defaulting on EMI payments can significantly decrease one's credit score, leading to difficulties in securing loans down the line. A drop of 50-70 points can greatly impact an individual's borrowing capacity.
Legal Action:
The extent of legal action taken by lenders depends on multiple factors, such as the duration of EMI defaults. While lenders may take a lenient approach for one or two missed payments, they have the option to pursue legal action if defaults last for more than 180 days. Under the Negotiable Instruments Act of 1881, lenders are entitled to file cases against defaulting borrowers in court. Additionally, if a borrower is identified as a wilful defaulter, criminal charges can be pressed under relevant sections of the Indian Penal Code.
Difficulty in Obtaining New Loans:
Banks record EMI defaults in credit reports, making it challenging for individuals to secure new loans. If defaults are not rectified within a specified timeframe, lenders may report the credit status as "written-off" to credit bureaus, damaging the borrower's credit history. This negative record further hampers their chances of obtaining future loans.
Borrower Rights and Protections:
Borrowers have certain rights and protections when it comes to loan agreements. These include the right to receive proper notice before any recovery proceedings commence, the right to decide the terms of contact with the bank, the right to be treated with civility and privacy, as well as the right to fair value assessment in case of asset repossession. It is crucial for borrowers to be aware of these rights to prevent any exploitation during the recovery process.
Steps to Take When Facing Default:
Should a borrower find themselves in a default situation, it is essential to take proactive steps to rectify the issue. These steps may include creating a budget, informing the lender about the situation, requesting deferment of EMI payments, seeking tenure extension or interest payment flexibility, considering asset liquidation, seeking support from family and friends, negotiating loan settlement terms, or understanding the implications of defaulting on secured loans.
Impact on Credit Score:
Defaulting on loan repayments and allowing the borrowed amount to turn into a non-performing asset adversely affects one's credit history. Lenders report such cases to credit bureaus, resulting in a significant drop in credit scores.
Conclusion:
With delinquency levels on the rise in India, it is crucial for borrowers to ensure they are financially capable of repaying loans before entering into any agreement. In emergencies where loan payments cannot be made on time, it is vital to inform lenders in advance to explore alternative solutions. Additionally, choosing a lender that offers flexible and affordable repayment terms can play a crucial role in avoiding default situations. Researching loan options, such as those available through the MoneyView website or app, can provide borrowers with hassle-free loans at reasonable interest rates.
Author
Pluto Team
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