What Happens When you Can’t Pay a Personal Loan in India?

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Opting for personal loans has become easier and more convenient than ever before. Earlier, it used to take multiple in-person visits to the bank to get your loan sanctioned.

But now, you can apply for personal loans from the comfort of your home through an online process. Submit your application, get approved in less than three days, and gain instant access to money.

While this has made it easy for you to handle financial emergencies, at times you may find it difficult when it comes to repayment of loans and you may struggle to repay the loan due to other financial commitments.

Disturbed, thinking what would happen if you can’t pay off the personal loan in India?

First, contact the lender and explain your situation to the lender, then learn about the consequences and solutions.

In this blog, we’ve put together the consequences of not repaying personal loans with effective solutions to avoid such situations.

What is a Personal Loan?

Personal loans are unsecured loans offered by banks and NBFCs to help people seeking financial assistance with instant cash. With the rise of online lenders, this loan is highly preferred by millennials as it has multiple benefits:

• No Need to Pledge any Asset
• Quick Verification Process (if done online)
• Flexible Repayment Tenure

As online personal loans are easy to access, some borrowers might take it as an advantage and don’t repay the loan willfully. On the other hand, other lenders could have lost their job or been facing a financial emergency which has led them to the non-repayment.

Let’s see the consequences of defaulting on a personal loan in India.

Also Read: I Need ₹5000 Rupees Loan Urgently: Quick Guide

Consequences of Not Paying a Personal Loan in India

Penalties and Hiked Interest Rates

Missed two months’ installment in a row and worried what would happen next? When you don’t pay one or two EMIs, the lender adds a penalty or additional charges to your outstanding amount. Adding to that, lenders might increase the interest rate of your total loan amount.

Phone Calls and Reminders

If you didn’t pay a particular month’s EMI, expect reminders in the form of phone calls and messages from lenders requesting you to carry forward the missed payment.

Damage Credit Score

Lenders constantly update your loan repayment behavior to the credit bureaus, so you have a high chance of noticing a dip in your credit score.

In case of missing an installment, the credit score gets reduced by 50-60 points which you can improve with good financial practices. However, increasing the credit score takes time and we advise you to repay your loans on time to avoid this.

Legal Actions

Ever seen people receiving legal notices for non-payment of loans in your circle? This legal notice is sent from the lender before filing a case against the borrower to recover the money.

Lenders opt for legal actions when every possible way of collecting money from the borrower ends in no use. And so, before filing a case, a legal notice is sent, warning the borrower to settle the amount in a given time frame. If not, the borrower must be prepared to deal with this case legally.

Two Possible Cases Lenders Proceed:

• After 180 days of non-payment, lenders can file a case under section 138 of the Negotiable Instruments Act of 188 and it becomes a civil case.
• Lenders can also file a criminal case under sections 403 and 415 of the Indian Penal Code, 1860, when they come to know that the borrower is intentionally defaulting

In the court, depending on the case, the borrower would be asked to repay the loan amount with penalties. Or else, in cases where the loan amount exceeds a few lakhs, the court might also order to seize the assets of the borrower.

Accumulation of Debts

When you skip EMIs casually, it works just like a quick fix that helps to handle only the temporary financial burden. And, knowingly or unknowingly, you’re increasing the debts that would compel you to repay in a short frame of time in the future.

Difficulty in Getting Future Loans

Getting approved for personal loans depends on two main factors: credit score and income. Lenders can easily assess your loan repayment capabilities by using the credit score.

But when you don’t pay your current loans properly and the outstanding amount is huge, this will be reflected in the credit score. On this basis, lenders can reject your loan application, reducing your chances of accessing personal loans when in need.

Even when lenders approve personal loans with a low credit score, you will be offered high-interest rates.

Also Read: I Need 30,000 Rupees Loan Urgently In a Day

Will you Go to Jail If you Don’t Pay a Personal Loan in India?

Generally, defaulting on a loan is considered a criminal dispute in India, and so you won’t go to jail. Banks and financial insurance might seek the help of the Debt Recovery Tribunal (DRT) to recover their money and it’s up to the DRT if they offer you additional time or seize assets.

But, in cases of intentional defaulting on personal loans, banks can file a criminal case under section 420 IPC (cheating) and section 406 IPC Criminal breach of trust. The court can order an arrest and the borrower has chances of going to jail in these cases.

Rights of Borrowers When you Can’t Pay Personal Loans

There are certain rights of borrowers that you can ensure when you can’t pay off your loans. They include:

• Right to Notice – According to the SARFAESI Act 2002, lenders should give a notice period of 60 days to repay the loan amount. Only then, the lenders should proceed to file a case.
• Right to Privacy – While recovering loans through collection agents, lenders shouldn’t disturb the privacy of the borrowers.
• Right to the Fair Value of Assets – In the case of selling a borrower’s assets to compensate the loan amount, lenders should value the asset properly with a transparent process.
• Right to Receive Balance – In most cases, assets would have a higher value than the actual loan amount. So, make sure you receive the balance value of the asset.

Calculate Your Personal Loan EMI 

How to Avoid Defaulting on a Personal Loan?

Depending upon your situation, use the following solutions to avoid defaulting on a personal loan.

Plan your Monthly Budget

To not skip your monthly EMI, plan the entire month’s budget right at the beginning of the month. From utility bills, accommodation, food, savings, and EMI, decide how much you would spend on each of these things according to your income and expenses.

Why Should you Create a Monthly Budget?

When you don’t have a plan, spending money without purpose can occur multiple times. With a budget, you’ll spend the money consciously which helps you stay on track with your loan payments.

Negotiate with the Lender

If you’re struggling to repay the loan amount even with a proper budget, consider negotiating with the lender. Explain your financial struggles to the lender and negotiate about your loan repayments.

Two ways you can opt for a solution:

• Lower the EMI amount by extending the repayment tenure
• Lower the EMI amount by converting the unsecured loan into secured (collateral) loan

Choose the first option when you’re sure you can afford to pay the EMI, as lenders cannot extend the tenure beyond a certain period. Otherwise, shift to collateral loans and choose lower EMIs.

Request a Free EMI Period

Let’s say you could not repay the loan amount due to the loss of your job or a downfall in your business. You’re planning to complete the payment once you join a new company or improve your business.

What do you do in such cases? Explain your genuine situation to the lender with proof and request a free EMI period. If your reasons are valid, some lenders offer a free EMI period of about 3-6 months.

Opt for Debt Consolidation

Let’s assume you have two loans to pay with high interest rates and you’re unable to pay monthly installments regularly. You can choose debt consolidation as a solution to be free from multiple loans.

Debt consolidation is using a new debt to settle smaller loans and liabilities and then have it as a single loan to concentrate. When you apply for a debt consolidation loan using Credmudra, you benefit from low EMIs and lengthy repayment tenure to manage your finances without any stress.

Liquidate Assets

Are you sure that you can’t pay off the loan by managing your monthly expenses? Liquidating assets can help you.

Liquidating assets is the process of converting any financial and physical assets such as land, gold, and stocks into cash by selling them. After converting into cash, you need to utilize that money to repay the loan in a single payment.

Consider this as the last solution when you’ve exhausted all other means to repay the personal loan.

Also Read: I Need 50000 Rupees Loan Urgently

Repay your Personal Loan with Flexible Repayment Tenure

Applying for and getting approved for personal loans is an easy process. But, repaying the loan amount completely without compromising your monthly expenses is a challenging task.

How do you repay your personal loan effortlessly? Start by choosing the right lender.

Some borrowers struggle to pay off the loans because of high-interest rates and monthly EMIs. Take the personal loan from a lender who offers you affordable interest rates with flexible repayment tenure and installments.

With Credmudra, you don’t have the stress of choosing the lender. Submit your application and we’ll match you with the best lender that fits your requirements.

Sign up on Credmudra for free to avail your personal loan in a stress-free way.

FAQs

1. What Happens When you Don’t Repay Personal Loans in India?

When you don’t pay personal loans, lenders take necessary steps like reminders, penalty charges, and sometimes even legal actions.

2. Will I Go to Jail if I Don’t Pay My Loan?

No. As this is a civil case, you won’t go to jail if you’ve genuine reasons for not paying your loan.

3. How Should I Avoid not Paying Personal Loans?

Plan your finances wisely and choose the lender who offers flexible tenures with competitive interest rates.

4. What is the Legal Action for Personal Loan Defaulters in India?

First, lenders send a legal notice warning the borrower to complete the loan repayment in a given time frame. Still, if the borrower ignores it, the lender will file a civil case in the court.

5. Will Online Lenders Take Legal Action if I Fail to Repay the Personal Loan?

Yes. Online lenders can take legal action against the borrower if they can’t recover the money.