Know Your Rights: What Happens When a Borrower Fails to Repay the Loan
When you avail a loan, it is understood that the said loan will be repaid within the given tenure and interest rate. But what happens if personal loan is not paid in India? What is the punishment for non-payment of a personal loan?
Read on to know more.
What Happens if Personal Loan EMI is not Paid
While a borrower is obligated to repay the loan on time, certain understandable circumstances may prevent him/her from doing so. Here’s what happens if personal loan EMI is not paid.
- Generally, if one misses the EMI payment once, the bank or lender may send a reminder in the form of an email, SMS, phone calls or app notifications. If the borrower is still unable to pay due to unavoidable circumstances, the lender may extend the deadline or even grant a moratorium in extreme cases.
- However, if the EMI is still not paid, a penalty may be charged but more importantly this will have a significant impact on the borrower’s credit score which will decline significantly.
- It is also important to note that if the borrower fails to pay three consecutive EMIs in a row, the lender then proceeds to treat the loan as a non-performing asset which will have a devastating effect on the borrower’s credit score and may even prevent him/her from borrowing in the future.
Legal Action Against Borrowers/Loan Defaulter
Did you know that 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?
As mentioned previously, if the borrower is unable to pay due to genuine, unavoidable circumstances then the lender may provide options that make it easy for the borrower to repay the dues.
However, if the borrower is deemed to be a wilful defaulter, i.e., does not pay even if he/she can, diverts the funds, or disposes the collateral without the lender’s knowledge then a criminal case may be filed against the defaulter.
The important thing to note here is that regardless of the steps being taken by the lender to recover dues, certain rights of the borrower will be respected. These include -
- Right to Notice
- Right to Fair Value
- Right to be Heard
- Right to Claim the Balance
- Right to be Treated Politely
In order to find out more about the legal action that can be taken against defaulters, check out our extensive article on the same.
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 EMIs due, they will cancel the auction and not sell the collateral.
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 as well.
In addition to this, you will find it very difficult to get a credit card, personal loan, home loan, or any other kind of loan from any banks or financial institutions in the future. Hence, it is advisable that you try all means possible to pay off your loan. If you wish to know more about the importance of one’s credit score, check out our blog on the same.
Getting a loan is an act of responsibility as it involves repaying the same on time. However, if the borrower is unable to repay the loan, the lending institution initiates a loan recovery process. While the steps slightly vary from one lender to another, it will either involve relaxing certain conditions to ensure easier repayment for the borrower or legal action. Defaulting on loans is also extremely detrimental to one’s credit score.
Therefore, avail a loan only if it is possible to repay the same on time and an amount that can be repaid.