What if a Personal Loan Is Not Paid: If you search for the words “personal loan” on your Google browser, chances are you’ll be shown nothing but advertisements and misleading interest rates from every major bank and NBFC.

And to the unsuspecting borrower, it might even seem like a great deal and almost too good to be true. To make it even better, these loans are given out to people with even bad credit ratings or even with no credit history.

Some NBFCs went the extra mile and offered loans to students as well. While taking on the loan, it’s all exciting and thrilling as soon as the money hits the account. But, thirty days after that joy comes the dreaded interest payments. This is where the trouble starts. 

Let’s assume that due to a genuine reason, you’re unable to repay the interest payments on your loan. What happens then? Will you go to jail? Or will your interest payments shoot up due to various charges? Or will the bank forgive your debt due to a lack of funds? Read ahead to answer all these questions in this article on What Happens If Personal Loan Is Not Paid!

Understanding The Idea Of Loans

When a bank, an NBFC, or a lender issues a loan to a borrower, they do not usually give out such hefty sums of money for free or without some sort of risk assurance. This assurance is an asset that the lender owns or the risk is passed on to a guarantor who agrees to take on the responsibility of default should the borrower ever do so.

This is how Gold Loans, Home Loans, Business loans, etc operate. The assets are pledged at the bank and then the funds are provided to the borrower. Until the loan is repaid in full at the end of the term, the bank will hold onto the assets as collateral in case of default.

Personal Loan Image

Now, a new wave of risky, unsecured loans is drowning many working professionals as well as students in debt. In the example above, we spoke about loans being backed by assets. When the bank doesn’t receive its payments on time, it will send multiple notices to the borrower to repay the loan and even provide extensions on the loan taken.

Should the borrower not respond even then, in the worst-case scenario, the bank auctions the asset to make back the money it had lent initially, along with a slight profit to cover the cost of the loan itself.

Personal loans are not backed by any assets, and should the borrower default, they levy heavy interest rates on the initial amount borrowed, creating an endless cycle of debt. But what happens when the borrower defaults on the loan?

What Exactly Happens If Personal Loan Is Not Paid

1. Increased Interest Rate

When you default on a loan payment or EMI, your interest rate is bound to increase. While long-term loans such as home loans or vehicle loans have an already lower rate of interest, default rates are much higher. 

2. Credit Score Impact

Besides paying higher interest rates, late fees, additional interest, etc. your credit score or CIBIL score will be impacted as well. The fact that the borrower has defaulted on the loan makes a negative impact on the credit score as well. This will be of concern when you apply for loans in the future as credit companies will have a detailed history of your financial credit history. 

3. Collection Agencies

When banks don’t get a proper response from you, the borrower, they outsource the job of loan repayment to collection agencies. These agencies have one goal – Make the borrower either repay their debt or seize their assets. 

4. Legal Action Taken By Lenders

Besides the measures mentioned above, Banks also send legal notices and take action against defaulting borrowers, if they consistently ignore the bank/NBFC notices. This is an extreme case scenario when banks are getting no response from the borrower and are forced to pursue the legal route. 

Quick Read: How to Get a Loan Against Shares – Requirements, Eligibility & More!

If You Are A Genuine Loan Defaulter, here’s what you can do

Firstly, loan default is not necessarily a voluntary act. There are cases where defaulters have genuine cause and concern for not being able to repay the loan. It could be a medical emergency, a death in the family, a last-minute emergency expense, etc.

There are fraudulent and wilful defaulters as well who try to cheat the banks out of their debts by choice. These are the cases where legal action is taken, especially if banks can prove that you have willfully defaulted on your loan. Be that as it may, you still have rights as a loan defaulter.

For instance, defaulting on a loan does not count as a criminal offense under the Indian Justice system. It comes under a civil dispute and thereby, does not cite imprisonment. If you genuinely cannot repay the loan, then the police cannot arrest you for default. 

1. Do Not Panic

Most defaulters undergo a panic spree as their financials are in a mess. This leads to a Domino effect of bad decisions, including absconding from the law. This is not the solution, and if anything, could make matters worse. Furthermore, if you have a genuine case for default, then your lender might be willing to extend certain relaxations on your loan. 

2. Lower The EMI

In banking terms, this is called loan restructuring. 

Banks can lower the EMI of the loan in one of two ways –

  1. Extend the duration of the loan or
  2. Convert the unsecured loan into a secured loan.

3. Allow EMI Free Period

In cases of severe financial duress, this option might prove ideal. Banks allow a short EMI-free period on your loan to ease the borrower’s hurdles. This could vary based on the tenure of the loan as well as the loan amount itself.

When the pandemic first sent shockwaves across the world, all financial institutions provided a short period where lenders need not have to pay interest or EMIs till the pandemic shifted over.

Keep in mind that this was a time when people were dying, jobs were cut and there seemed to be no solution to the rapid wave of the pandemic. 

4. Communicate With The Lender

One of the biggest mistakes that borrowers make is absconded and evading the banks. All financial institutions have unlimited resources and influence to track your movements.

To save yourself a lot of trouble and save face, it is better to communicate with your lender directly and explain your situation. While it is very unlikely that banks will write off your debt, they may provide temporary relief or even solutions to your situation.

5. Refinancing Option

Going back to the second point, banks can extend the duration of your loan and lower the monthly payment you need to make to them. But this might only be applicable if you carry a good credit score and have an excellent credit history prior to defaulting on the loan.

In Closing

A majority of borrowers of personal loans are first-time users and quite a major portion of them are either students or young professionals. Before taking on debt, ask yourself the following questions –

  1. Is it necessary?
  2. Can I pay it back even in the worst-case scenario?
  3. What is the alternative to taking a loan?

As a first-timer, it can be quite easy to get lured into taking a personal loan. For a short while, it might feel like you’re getting a free deposit of money at zero cost. Unless it’s an emergency, most of the loans issued today are for wants more than needs.

Just like how mutual funds provide a disclaimer, remember – Read the terms and conditions before accepting. So, that’s all for the article on what if a Personal Loan Is Not Paid, let us know your thoughts in the comment section below.

This might be an excellent time for investors to enter the market. However, investors with little knowledge can take courses on FinGrad to make the right investment strategy. Happy Investing!

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