Legal Action for Loan Defaulters

Loans are boon for those in dire need of funds and can help one tide over certain situations. However, it is the responsibility of the borrower to repay the loan on time and in full as not doing so can have detrimental consequences for him/her. On this page, we will be talking about the impact of loan default while providing information about legal action against loan defaulters.

Not every defaulter is a wilful defaulter, sometimes borrowers have genuine concerns that prevent them from repaying the loan. The good news is that borrowers are entitled to certain rights and regulations that seek to help them with repayment. Guidelines put forth by the RBI not only help banks and financial institutions receive their payments but also protect the rights of borrowers.

Punishment for Non-payment of Personal Loan

The punishment for non-payment of personal loans or any other type of loans will vary based on multiple factors but as per the RBI mandate, at no point in time will the borrower’s rights be compromised.

Breach of the contract when it comes to loan repayment itself is not a crime but lenders can approach a civil court in order to recover the same. Defaulters are therefore liable to repay their debts and if a loan has not been repaid for more than 180 days, the lender is allowed to file a case against the borrower under Section 138 of the Negotiable Instruments Act of 1881. Sometimes unavoidable circumstances prevent borrowers from being able to repay their loans such as the recent coronavirus pandemic or even other situations such as failure of a business, etc. i.e, circumstances beyond the control of the borrower. Such cases will not be considered as ‘cheating’ but instead, the lender may work with the borrower by modifying the repayment circumstances so as to ensure that the loan is repaid.

However, if the intention of the borrower is proven to be fraudulent or dishonest right at the time of entering into the loan agreement, a criminal case can be filed against the defaulter. According to RBI, a ‘wilful defaulter’ is one who indulges in-

  • Default despite having the capacity to pay
  • Diversion of loan or funds
  • Disposal or transfer of collateral provided as security without the knowledge of the lender

Any of the above will result in legal action against the defaulter

What Happens When a Borrower is Unable to Repay a Loan

A borrower may be unable to repay his/her loan due to multiple reasons but regardless of the same, there will be a significant impact on the said borrower’s financial standing. Loan default results in the following:

  • Impact on the Borrower’s Credit Score
    One of the major repercussions of loan default is that the credit score of the borrower will decrease significantly. Credit rating institutions receive reports regarding the borrower’s financial activities from the lender. Defaulting or delaying the EMI payment is also reported and this results in lowering of the credit score and will negatively impact the borrower’s future borrowing capacity. Additionally, when a report consists of loans that have been defaulted or written off, it prevents lenders from providing loans to such applicants in the future.

  • Reminders By the Lending Institution
    Every borrower is entitled to receiving a set number of reminders and notices from the lending institution. If an EMI is delayed once or twice, notices are sent regarding the late payments. Additionally, if the borrower is unable to repay the loan due to certain circumstances, the lending institution may extend the grace period or even the repayment tenure. However, if the reminders and notices are not heeded by the borrower and the EMI is not paid despite this, further action may be taken by the lender such as marking the borrower as a Non-performing asset or NPA which will prevent the borrower from availing any type of loan or credit in the future.

  • Penalties and Legal Action
    In case notices and reminders do not result in the loan being cleared, lenders may impose penalties on the borrower or even take legal action. A missed payment of a few days can still be rectified but if the payment has not been made for more than a month or two, it can result in serious damages. If collateral has been provided, this may be used as a way to recover the loan by taking possession of the same.

What Happens When a Borrower is Unable to Repay a Loan

A borrower may be unable to repay his/her loan due to multiple reasons but regardless of the same, there will be a significant impact on the said borrower’s financial standing. Loan default results in the following:

  • Impact on the Borrower’s Credit Score
    One of the major repercussions of loan default is that the credit score of the borrower will decrease significantly. Credit rating institutions receive reports regarding the borrower’s financial activities from the lender. Defaulting or delaying the EMI payment is also reported and this results in lowering of the credit score and will negatively impact the borrower’s future borrowing capacity. Additionally, when a report consists of loans that have been defaulted or written off, it prevents lenders from providing loans to such applicants in the future.

  • Reminders By the Lending Institution
    Every borrower is entitled to receiving a set number of reminders and notices from the lending institution. If an EMI is delayed once or twice, notices are sent regarding the late payments. Additionally, if the borrower is unable to repay the loan due to certain circumstances, the lending institution may extend the grace period or even the repayment tenure. However, if the reminders and notices are not heeded by the borrower and the EMI is not paid despite this, further action may be taken by the lender such as marking the borrower as a Non-performing asset or NPA which will prevent the borrower from availing any type of loan or credit in the future.

  • Penalties and Legal Action
    In case notices and reminders do not result in the loan being cleared, lenders may impose penalties on the borrower or even take legal action. A missed payment of a few days can still be rectified but if the payment has not been made for more than a month or two, it can result in serious damages. If collateral has been provided, this may be used as a way to recover the loan by taking possession of the same

Rights of Every Loan Defaulter

Availing a loan needs to be accomplished with caution and responsibility. By availing a loan, the borrower is automatically liable to repay the same by following the terms and conditions imposed by the lender. However, even if for some reason the borrower is unable to repay the loan, he/she does have certain rights in place. These are:

  • Right to Notice
    The borrower must be given enough time by the lender before taking action to recover the outstanding amount or repossessing the asset provided as collateral

  • Right to Fair Value
    If the borrower is unable to repay the loan and the lender has repossessed the assets provided, the value cannot be solely decided by the lending institution. A fair value notice must also be sent to the borrower informing him/her of the sale price that has been evaluated

  • Right to be Heard
    The borrower has the right to raise objections to the notice of repossession sent by the lender during the notice period.

  • Right to Claim the Balance
    In case the lending institution is receiving a high price for the asset that has been repossessed by them, the leftover balance can be claimed by the borrower

  • Right to be Treated Politely
    Probably one of the most important rights that a borrower has is that he/she cannot be mistreated, harassed, humiliated, or abused during the loan recovery process

The sole priority of every borrower should be to repay the loan on time. However, if there are circumstances preventing this, borrowers are encouraged to communicate with the lender in order to arrive at a situation. Depending on the circumstances, the lending institution may increase the repayment tenure so that the EMI is reduced or in rare cases even write off a part of the loan. Other terms and conditions could be restructured as well. Additionally, availing of financial help from friends or relatives in order to repay the loan is also an option that can be explored.

Conclusion:

Loans are designed to help individuals financially and therefore every effort must be made to repay the same on time. While availing of a loan, borrowers must ensure that they are in a position to repay the loan while fulfilling all the terms and conditions. Choosing the right lender is also very important as every lending institution offers varied rates of interest or repayment terms.

Applicants can avail of quick and hassle-free personal loans from one of the most highly rated loan providers in the country, Money View. The rate of interest starts at just 1.33% per month while the repayment tenure can extend up to 60 months. Additionally, the eligibility check will allow applicants to choose the amount of loan that they wish to borrow based on certain pre-set terms and conditions