What will Happen if You Don’t Pay a Personal Loan?
21st Dec 2024
3:55
On this Page:Consequences of unpaid personal loan
If you’ve failed to repay your personal loan, the lender may take the following steps:
Legal Action: The lender can take a civil lawsuit against the borrower. In this, you will receive a court order to repay the loan amount with interest and any additional charges. In extreme cases, the court may also order to seize the borrower's property.Criminal Charges: Upon non-payment of a personal loan, the lender can file criminal charges under section 420 of the Indian Penal Code (420). This will lead to a maximum of 2 years imprisonment. But, the lender will take this action only if evidence of fraud is found.Poor Remarks on Credit Report: When you don’t pay off your personal loan, it gets reflected in your credit report, too. A remark of “Willful default” will be shown in your credit report. And this will reduce your chances of getting any line of credit in the future.How to tackle a personal loan default?
In case you are in default due to some financial problem, you can take the following steps to avoid the consequences of loan default:
Reach for a settlement: You can go through the settlement process and avoid legal action from the lender. This option is for borrowers who are facing financial distress. In case of a settlement, you have to pay a lump sum amount to the lender to settle your loan. This amount is usually less than your outstanding balance. Once the loan is settled, check your credit report to see if it is updated in your records.Negotiate for a deferment period: This option is provided to the borrower if they’re dealing with a short-term financial issue. So what happens is your EMI payment will be paused for a month or two, and later, it will be resumed. This way, you can avoid the consequences of nonpayment, and your credit score won’t be affected.Restructure your loan: In case you are having trouble paying the EMI amount, you can contact the lender and restructure your loan. In this, your loan tenure will be extended, which will automatically reduce the EMI amount, making it easier for you to afford the loan repayment.RBI guidelines on personal loan non-payment
RBI's Fair Practices Code (FPC) emphasises the importance of clear communication between lenders and borrowers:
It encourages lenders to provide complete information about loans in simple, easy-to-understand language.Furthermore, the rules around recovering unpaid personal loans prohibit any form of discrimination and emphasise respectful and ethical collection practices.Lenders are required to respect borrowers' privacy and treat them with dignity, avoiding any form of harassment during the recovery process.RBI acknowledges that borrowers may face financial difficulties due to circumstances like job loss or medical emergencies.Lenders are required to assess the borrower's situation and may extend the repayment period or reduce the interest rate.These measures aim to support borrowers in managing their debts more effectively during challenging periods.
Conclusion
Managing a personal loan responsibly is crucial to maintain your financial health and creditworthiness. Defaulting on a personal loan can lead to severe consequences, including legal action, criminal charges, and a significant negative impact on your credit score. It’s essential to be proactive if you encounter financial difficulties; options such as reaching a settlement, negotiating a deferment period, or restructuring your loan can help you navigate challenging times. By staying informed and taking timely action, you can protect yourself from the repercussions of loan default and ensure a better financial future. Remember, maintaining a good repayment history is not just about fulfilling a financial obligation—it’s about safeguarding your credit profile and overall financial well-being.
