A restaurant owner cannot repay his Personal Loan and will likely default.

What Happens When You Default on a Personal Loan?

Q: What is a loan default?

It is the inability to repay the loan within the stipulated time.

Q: Will a personal loan default affect my credit score?

Yes, you will receive a warning in the first 30 days. From 30 to 60 days your credit score will be affected. Beyond 90 days, your credit score and creditworthiness will be seriously affected.

Q: How do I get out of a loan default?

Communicate transparently with the lender, explore loan restructuring, stay on a strict monthly budget, and consider debt consolidation.

Q: What are my rights as a loan defaulter?

You could be a defaulter because of emergency expenses. The lender is required by the RBI to permit 60 days to clear the unpaid loan amount. The recovery agents cannot harass or abuse you. The lender must adhere to legal ways of loan retrieval.

Q: Can I get my personal loan default removed?

You must talk to your lender and clear your outstanding amount by negotiating and settling for easier terms.

• August 28, 2024

A personal loan is a big commitment. You would have thoroughly researched and considered your monthly financial commitments before availing of one. Let’s see what happens in the case of a loan default.

Financial difficulties can hit you at any time. And, if you have a personal loan in the mix, it would burden you even more. A personal loan default can make your financial situation worse quickly.

So, is there no way out? What if you haven’t deliberately defaulted on your loan? Surely there must be some way out. Let’s look at the consequences and what to do when faced with a personal loan default.

Consequences of Loan Default

The consequences depend on how many payments you’ve missed and by how many days.

You’ll be the recipient of several phone calls. However, the lender is lawfully permitted to request you to clear the payments; the RBI forbids abusive treatment or harassment by lenders.
Beyond 30 days of non-repayment, the lender might report you to the credit bureau. And this will affect your credit score.
A missed payment between 30 and 60 days will affect your credit score, but that can be recovered over time if you make the payments.
Beyond 60 days of defaulting on your loan can seriously impact your credit score. So much so that you might be denied a loan in the future.
If you do not repay your loan even after 180 days, the lender will write off your loan as a loss. Your account will be handed over to a third-party collection agency.
The lender can file a civil case against you.
Your post-dated cheque will be presented to the bank for processing. If this cheque bounces, your case will be changed to a criminal one.
You will be placed on a defaulters’ list, preventing you from receiving a loan in the future.
Under extreme cases, you may be imprisoned.

What to do if I’m Facing a Financial Crisis?

You may not willingly be a defaulter; financial crises could have put you in such an unfavourable situation. There are things you could do to improve your situation.

Reach out to the lender

Communicate with the lender about your financial situation. This can open options and you could walk away without a big headache. Lenders would be open to discussing alternate repayment strategies and advising you on the next steps.

Restructure you loan

Discuss extending the repayment tenure and reducing the monthly EMI to ease your financial burden.

Budgeting

Prioritise expenses and aim to repay missed loan instalments quickly. Being disciplined in your expenditure can free up some extra money to clear your debt.

Debt consolidation

Consider taking a bigger loan with a low interest rate and paying off the smaller, high-interest loans. This method helps you pay off your debts by making repayments more manageable.

Conclusion

A loan default can go from bad to worse very quickly. It could land you in a serious penalty, a loan blacklist, or even in prison.

Review your monthly commitments before taking a loan. If you can put off the big-ticket personal loan expense, that would be wiser than overestimating your capacity to repay.

Even if you default for genuine reasons, be forthcoming with your lender and explore options to get out of this rut.