What happens if you do not repay Online Loan on time – Legal obligations

When you take a personal loan from a lender, you make a legal commitment to repay the loan as agreed. Although you have every intention of repaying the loan, your plan may not go according to your schedule. Life happens, and you may miss one payment, then another, and before you know it, you have earned a title of a personal loan defaulter. So, what happens when you default? It’s important to know how a personal loan default affects you, your credit health and your life.

What is personal loan EMI default, and who is a loan defaulter?
Missing one EMI payment doesn’t make you a defaulter. When you fail to pay several EMIs on time, your lender reports you as a defaulter. Some lenders may offer a grace period after the payment date during which you can make the payment; however, a late fee will be charged, but you won’t earn the title of a defaulted.

What happens when you default on your personal loan?
There are major consequences for defaulting on a personal loan:

1. Your credit score is affected
All banks and NBFCs report missed payments to the credit bureaus, such as the CIBIL and Equifax. This lowers your CIBIL score drastically. Low credit score makes it hard for you to get any form of credit/loans in the future.

2. Your co-signer or guarantor is impacted
If you had a co-signer linked to the personal loan, the missed payments affect their credit score too. Also, they will receive calls from the lender and the recovery agents in an attempt to recover the loan amount.

3. Your financial burden grows
Late fees, penalties, legal costs, etc. add up to the outstanding loan balance making the total much higher than what you owe.

4. Banks and NBFCs may take a legal action
If the banks and NBFCs fail to recover the loan amount from you, they may resort to the legal path to recover the money.

What to do if you default on your personal loan?
If you have defaulted on a loan, take a few steps to tackle the situation:

1. Don’t panic
Keep a calm mind and figure out the reason you were unable to make the payment. Then, figure out a solution to avoid this situation from reoccurring.

2. Talk to your lender
Don’t underestimate the power of communication. Explain the reason for the default to your lender. Your lender may come up with a solution that benefits you both.

You may ask your lender for more time to make the repayment
You can request your lender to restructure the personal loan – increase the loan tenure and decreases the EMI.
In the worst case, you can request the bank for a settlement.
3. Consider refinancing
Through refinancing, you may be able to reduce your EMI amount. However, you need to have a good credit score for refinancing your loan.

4. Increase your income or cut back expenses
Take up short-term jobs or freelance projects to earn more money. If that’s not an option, then consider budgeting your monthly expenses.

5. Know the rights of defaulters
If you are defaulter, wilful or genuine, you have certain rights. The banks and financial institutions are governed by the RBI. They are committed to best practices as a part of the code of commitment to their customers. So, as per law, the banks or the recovery agents appointed by the banks cannot threaten or manhandle you. Read more about the rights of loan defaulter here.

A personal loan is an unsecured loan and is given to you based on your repayment ability. Therefore, it is your responsibility to repay the loan as agreed. Ignoring this responsibility can have negative consequences to your credit health and financial life.

NB: Always check RBI Registration Before taking any instant loan from apps or website

NBFC List 1: https://rbidocs.rbi.org.in/rdocs/content/DOCs/NBFCICC302019.xlsx

NBFC List 2: https://rbidocs.rbi.org.in/rdocs/content/docs/733315.xlsx

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