What Happens When Personal Loans are Not Paid in India?

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.

Negative Consequences on Non-Repayment of Personal Loan

When you are unable to repay your EMIs, you may start worrying what are the home loan defaulter legal actions that you might have to face or even for personal loans. So, here is a list of issues that you might have to face on non-repayment of your EMIs-

EMIs are an affordable loan repayment method as compared to lump sum repayments. But when you default on your EMI payments, it increases your liabilities.

You might be forced to pay the entire amount, including payment penalties, within the remaining duration of tenure. This will add to your financial burden.

A good credit score makes your path easy for getting loan approval.

But if you default on EMI payments, your credit score can decrease by 50-70 points, which will impact your ability to borrow in the future.

If you are searching for information on ‘car loan defaulter legal action’ or even for personal loans, you must know it depends on many factors. A lender may go easy on you if you have missed only one or two EMI payments.

However, they can take legal action against you if you default on EMI payments for over 180 days. Under section 138 of the Negotiable Instruments Act 1881, the lender has the prerogative to file a case against you in court and demand their money back. 

Also, if you identify as a wilful defaulter, the lender can press criminal charges under sections 403 and 415 of the IPC, 1860 against you.

After the Insolvency and Bankruptcy Code, which was enacted in 2016, lenders could take action against those who failed to repay their loans. According to this, even borrowers had more protection from legal action. The RBI also made it more difficult to take out personal loans by introducing tighter regulations.

Banks record your EMI defaults in your credit report.

If you have cleared your default payment before a certain number of days, there will be no issue. Otherwise, the lender will report your credit status as a "written-off" to credit bureaus. It will indicate your history as bad, making it difficult for you to obtain new loans.

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- 

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 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. 

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.

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.

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.

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- 

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.

If you are at the 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.

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.

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.

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 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.

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.

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 as 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 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.

Conclusion

According to the data published by CRIF High Mark, the delinquency levels in India shot up to 12.7% as of March 2021, compared to 8.2% in March 2020 and just around 4% at the end of March 2019. All the data correlates to delinquency levels of 30 to 180 days.

When you take a loan, you must make sure that you are in a position to repay it. Also emergencies may come uninvited and if you face a situation where you cannot pay the EMIs on time, it is important to let your lender know in advance. 

For this reason, it is also vital to choose the perfect vendor that is flexible and allows you more affordable terms of repayment. You can visit the moneyview website or download the app to take a look at hassle-free loans at affordable interest rates.

What Happens When Personal Loans are not Paid in India? - Related FAQs

If you have been a personal loan defaulter for 10 years, you can still resolve your loan. You can contact the bank or the vendor to settle your loan with one or two lump sum amounts of money.

If you are searching for ‘car loan defaulter legal action’ or ‘home loan defaulter legal action,’ we’ve got you covered -

  • Since home and car loans are secured loans, your property or vehicle might be confiscated by the bank on non payment of EMI. 

    • If you have not repaid for more than 180 days, the lender is allowed to file a case against you.

      • However, a criminal case can be filed only if you are a wilful defaulter or fraudulent.

Loan settlement is an agreement between the vendor and the customer. It is used as a last resort when the customer is unable to pay the EMIs. It will vary depending on the situation and amount of money left unpaid.

Your loan account will become an NPA or Non-performing asset when you have not paid your EMI for over 90 days. In this case, even your credit score will be severely affected.

According to the RBI (Reserve Bank of India), a wilful defaulter is one who-

  • Defaults despite having the capacity to pay

    • Is involved in diversion of loan or funds

      • Disposes or transfers the pledged collateral without the knowledge of the lender

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