Not many realise the importance of repaying debts taken from banks, NBFCs or online lenders. It’s the primary responsibility of the borrower to make the repayment on-time. Failure to do so can result in barring you from availing any future loans when you need them the most. There are also wilful defaulters who just ignore the duty of making repayment deliberately.
It is an undeniable truth that even a single default is recorded on your credit report, and it can have a negative impact on your credit score. Want to know what happens after a default on a personal loan? Read on!
Consequences of Defaulting on a Personal Loan
The negative impact on your credit health depends on how your lender reports the credit activities to the credit bureaus. For example, if you fail to make the repayment on-time but have paid within a few days after the due date, it would be considered a late payment. The impact of late payment may depend on various factors; how often you have paid late and how long you took to make the payment. Most lenders do not report your late payment if it is just delayed by a few days. But when you make the payment after 30 days, the chances are likely that your late payment gets reported which will have a certain impact on your credit health.
A missed payment of over 30 to 60 days will have a negative impact on your credit health. But it won’t cause a severe lasting damage to your credit score if you are able to make the repayment within 60 days with penalty. Defaulting on your personal loan for more than 60 to 90 days is a cause of concern as it can have a serious damage on the credit score. It gets recorded on your credit report, and lenders consider you a repeat offender which makes it difficult for the availability of future credit.
Missing the payment on your personal loan over 180 days will have a lasting impact on your credit health. The lender reports your credit status to credit bureaus as ‘Written-off’ account. This negative status bars you from getting any credit in the future through banks.
Firstly, an in-house collection team tries to establish communication with the defaulter to retrieve the amount. If that fails, a third-party collection agency will be appointed to recover the loan amount.
When you miss an EMI on your personal loan, the lender first sends a notification through an SMS or Email. If you ignore the warning for the first 30 days, the banks still send the intimation about making the payment. You will be sent a notice by post to the registered address. When all the warnings not heeded, the lender appoints a recovery agent.
Additional Reading: Know What Happens When You Fail to Repay Your Loan!
Legal Actions Against Defaulters
Defaulting is a civil crime and not a criminal crime. Hence, the police cannot arrest the defaulters. However, the defaulters are liable to pay off the debts. After 180 days of non-payment of the personal loan, the lender can file a case against the borrower under section 138 of the Negotiable Instruments Act, 1881.
If the borrower is determined as a wilful defaulter by the financial institution, a criminal case can be initiated under the provisions of Sections 403 and 415 of the Indian Penal Code, 1860. The borrower is considered a wilful defaulter if he/she has the financial ability to repay but fails and used the money for illegal purposes. Apart from that, the borrower has sold the collateral or security deliberately and fled the country or keeps absconding.
However, before determining a borrower as wilful defaulter, the RBI has directed the banks to send a notice to the concerned person who will be given 15 days to respond to the notice with the grievance redressal committee. Only after considering the committee’s view, the person will be considered a wilful defaulter. If the person is termed as wilful defaulter, he/she will not be able to avail any service or facility from any financial institution or new venture for the next five years. The defaulter will also be barred from participating in the capital market.
Rights of Defaulters
Not all the borrowers are wilful defaulters. There are some genuine defaulters who may have genuine problems for non-repayment of the personal loan. Defaulters are also entitled to certain rights that must be honoured by the lender and safeguarded by law.
The defaulter has the right to ample notice from the lender. Typically, the lender should give a notice period of 60 days to pay off the debts. The recovery agents appointed by banks cannot beat or manhandle the customers. As per the RBI direction, the banks have committed to best practices as part of their code of commitment to customers.
Banks cannot term any defaulter as wilful defaulter as it is determined based on the views of the Grievance Committee.
Best Things To Do To Avoid Legal Actions
Genuine defaulters can avoid all the hassle by taking the following steps.
You can approach the lender and talk to them about your existing problem. You may ask for some more time to make the repayment or restructure the persona loan.
You can talk to the lender about increasing the loan tenure and decrease the EMI amount. This can help reduce the loan burden and pay off the debt with ease.
In the worst case, you can request the bank for a settlement. It means that you will make a payment which is part of the outstanding balance. Though it can give you relief from the debt burden, it can have a negative impact on your credit health. The rest of the amount needs to be cleared to avail future credit.
A personal loan is provided without any security based on your repayment ability. It’s the duty of every borrower to make the repayment as per the agreement. Neglecting this responsibility will have its consequences and impact on credit health.