What Happens When Personal Loans are Not Paid

Banks usually examine your 5C's ( i.e., capacity, capital, condition, collateral, and character) before lending you a personal loan. It assures a bank that you can repay the entire loan amount in time.

However, in some extreme cases, borrowers default on their EMI repayments for various reasons ranging from genuine financial problems to willful default. 

If you have faced such an issue and are searching for ‘lost job unable to pay personal loan’, or other such related terms, don’t worry! This article will cover everything you need to know.

Your Rights As a Borrower

If you searched for ‘lost job’ or ‘unable to pay personal loan’, you are at the right place.  The good news is that when you take a loan, you are granted certain rights and protection as a borrower. Some of your rights are listed here- 

• Right to Get Proper Notice 

It is the responsibility of a bank to inform you about your dues in case you missed your EMI payments. You can request a bank to give you a sufficient notice period to pay your dues. 

Also, to initiate a recovery proceeding against you, it is mandatory for the bank to send you a notice at least 7 days before the proceedings start. 

• Right to Decide the Terms of Contact

You can choose the time and place where you want the bank to contact you. 

There is a fixed time between 7:00 a.m. and 7:00 p.m. when a bank is allowed to contact you. It means that a bank cannot call you whenever they want and cause you disturbance. Hence, it is your right to notify them not to call you at a specific time, and a bank cannot refuse. 

The bank must also ask you to decide the place of contact as it is your sole discretion when you want to be contacted. 

However, if you cannot decide on a meeting place, a bank representative is allowed to come to your residence. If you are not available at your home, they can visit your workplace to meet you, if you have not specified against it.

• Right to Be Treated with Civility

Banks are prohibited from sharing the details of your outstanding EMI with other parties. They are supposed to respect your privacy by keeping your default record within their staff. 

In addition, if a bank’s representative engages in misconduct such as yelling, using abusive language, physical intimidation, or violence toward you, you have a legal right to press criminal charges.

• Right to Fair Value

If you are unable to repay the loan and the bank or lender decides to possess the assets provided, the value needs to be decided fairly. The lender cannot decide it by themselves, and the sale price must be informed to you after evaluation.

Also, the model policy created by the Indian Bank Association specifies that repossession of property should be the last measure. The bank needs to send a prior notice to you mentioning all details clearly.

• Right to Know The Recovery Agents 

Generally, banks hire professional recovery agents to recover their money from customers who may have defaulted. So, it is the right of borrowers to know the details of the recovery agent being sent by their bank.

Things To Do If You Default

There might be a variety of reasons why you defaulted. But now that you are in a difficult situation, getting out of it should be your priority. Here are the steps that you can follow- 

• Creating a Budget

Create a budget to avoid all unnecessary expenses. Try to focus on your needs and cut out on all your wants. This way you will be able to save money for your EMI payments. 

If you are not in a financially comfortable situation, it is better to limit the usage of credit cards. It will save you from wasting money on unnecessary purchases.

• Informing the Lender

If you are at risk of becoming a defaulter, then it is better to inform the lender about your situation beforehand. If you have repaid loans in the past on time, you can always share these documents with them. This may convince them to give you more time or allow you to pay in smaller EMIs.

• Defer Paying EMI

It is advisable to contact your lender and explain your reasons for not paying EMIs. The lender might defer your EMI payment for the following month. 

However, the bank will charge a late payment fee for deferring EMI.

• Tenure Extension

For long-term reasons like salary cuts or job losses, it is better to request the lender to restructure your loan format by extending the tenure.

It will protect you and will bring you on track for repaying EMIs.

• Interest Payment Flexibility

To release your financial stress, the bank might allow you to pay only the interest for a couple of months. This option is not commonly provided, but you can consider it if you have a good track record and a positive relationship with the bank. 

However, you have to submit your request in the written format, stating a fixed time when you want the relaxation. You will also need to assure that your EMI payment will be on track after this.

• Liquidating Investments

Liquidating your investments is one of the acceptable options. You can liquidate your investments to get relief from your outstanding loan. 

It depends on how many investments you want to sell and at what price. This way, investments can save you from high interest mounting on your overdue loan.

• Ask Family and Friends for Support

Before introducing your request to your family and friends, it is better to comprehend the amount you need to repay your loan burden.

For some people, it might not sound like an ideal option, but instead of facing any legal action by a lender, it is okay to ask for support from your family or friends.

• Loan Settlement

If none of the above options work for you, then you can discuss loan settlement with your bank. This varies in situations and might mean paying a lump sum amount to settle the loan. It might also mean that whatever you have paid would be considered a settlement, and you won’t have to pay anything further. 

But compared to other options, loan settlement impacts your credit score more harshly.

Defaulting on Secured Loans

Secured loans require an asset or collateral as a pledge. The collateral can be anything of tangible value such as jewelry, real estate property, and so on. 

When one fails to pay the EMIs on time, the bank/lender will decide to sell or auction the collateral and send a letter to the borrower regarding the date of sale or auction. However, the borrower has a right to the amount left over after the auction is completed and the required dues have been paid.

The auction can be averted if the borrower decides to settle the dues even after the letter has been sent. Once the bank receives the due EMIs, they will cancel the auction.

Defaulting on Loan and Credit Score

When you fail to pay off the borrowed amount even after a certain period of time, the lender will report your loan account as a non-performing asset (NPA) to the credit bureaus. This will severely affect your credit history and bring down your credit score.