Personal loan default: Check these key details to avoid financial crisis
22 January, 2025 | 19:50 IST
A personal loan can be availed by individuals for a plethora of reasons. In today’s digital world, borrowers can apply for personal loans and get the money in their bank accounts almost instantly.
While availing loans has become more convenient with the emergence of digital lending platforms, loan defaults could lead to serious consequences. It needs proper financial planning and commitment to repay the debt within the pre-defined tenure. The failure to pay the equated monthly instalments (EMIs) within the due date will negatively affect the credit score while leading to other consequences like legal action by the lender.
The lenders, including banks and non-banking financial companies (NBFCs) clearly lay out the procedure to recover the pending dues in case of a loan default. So, to avoid financial as well as legal trouble in future it is advisable to go through the repayment terms and conditions in detail.
You can avail a loan up to Rs 15 lakhs on the Moneycontrol app and website using a 100% paperless process. Loans on Moneycontrol start at an interest rate of 12% per annum.
Let’s delve deep into personal loan default and the possible consequences of the non-payment of the debt.
A personal loan default happens when a borrower is unable to make the payments of the EMIs as per the due date. The failure to repay the loan on time can happen due to various reasons. For example, the borrower can have genuine financial issues like unemployment, sudden medical expenditure, an accident or poor financial planning. It can lead to unnecessary stress and can have a number of consequences, including legal action by the lender. A loan default is a serious issue but can be resolved by having a discussion with the lender and chalking out settlement methods. Personal loan default can also lead to difficulties for new borrowings in the future.
Personal loan default can lead to several consequences. Let us take a look:
Your credit score will go down with every delay in EMI payments.This is because the lender provides regular updates of your repayment behaviour to the credit bureaus. These credit bureaus then use the information to update your credit score. Every EMI default or delay up to 30 days could decrease around 50-100 credit points from your score depending on your credit profile. If you keep defaulting your repayments, the damage to your credit score will be irreversible.
Higher debt burden Failure to pay the EMIs could lead to mounting debt burden. The EMIs make it easier to repay the loan, wherein you pay a certain small amount every month. Not paying the EMI for one or more months can increase the total payable amount for the rest of your loan tenure. The bank will also charge late fees, higher interest rates and default penalties, further increasing your outstanding amount.ALSO READ:Actual Cost of a Personal Loan: Don’t ignore these fees and charges
Debt collection pressureThe lender initiates a recovery process if you keep missing your personal loan repayments. This may include phone calls, SMS, e-mails and letters from the lender. When these efforts fail, the bank or the NBFC may transfer your case to a third-party collection agency, who can aggressively chase you for repayment of your debt.
Legal action may be initiatedDefaulting a personal loan repayment for over a period of 180 days allows the borrower to take legal action. The lender is eligible to file a legal case against you under Section 138 of the Negotiable Instruments Act, 1881, if you keep missing your EMIs. If the lender finds that you are a wilful defaulter, meaning that you are missing your repayments consciously and on purpose, they can press criminal charges against you as well.
You may face issues in securing new loans When your credit score is lower, you may face difficulties in securing a new loan. This is because your credit score is primarily based on your loan repayment history and a low number will mean that you have defaulted on your EMIs. This would not give confidence to future creditors to offer you loans.
Personal relationships can take a hitWhen you default on your personal loan repayment, everything goes down a spiral. Your dues increase, and you may have to depend on friends and family for financial help. This can cause stress in your relationships with them.
In conclusion, a personal loan default can impact your life in more ways than one. However, all of this can be rectified. If you are actually going through some difficult financial times, you can speak to the lender and come to some settlement agreements. For future loans with a low credit score, you can opt for secured loans where you have to pledge some assets as collateral. Alternatively, you can take a loan with the help of a guarantor. Make sure you repay these debts on time to rebuild your credit score.
If you are looking for a multi-purpose loan from a trusted platform, you can explore Moneycontrol app and website for instant cash up to Rs 15 Lakhs from top lenders. Interest rates start at as low as 12% per annum.
Defaulting on a personal loan can have adverse consequences, from a damaged credit score to potential legal action. Learn how to manage repayments effectively and avoid any financial pitfalls.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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