Personal Loans are becoming a popular financial tool. They also offer quick access to funds for any purpose. Many people opt for a personal loan when they need extra cash. A personal loan can be taken without any collateral. Taking a personal loan is easy, but it is very important to maintain financial discipline while repaying, because of this, many fail to meet their payment obligations. Everyone needs to know what happens if the personal loan is defaulted. This article provides insights into what happens if there is a default on a personal loan.
What is Considered a Loan Default?
- Loan default usually occurs when the borrower does not repay the specified amount within the specified period.
- Personal loans are considered default after 30 to 90 days of the actual payment date.
- Even before considering a loan as a default, they are marked as delinquent (delayed payment but not defaulted)
- Most of the lenders in India consider a loan as an NPA (Non-Performing Asset) if the repayment is not made before 90 days.
- If a loan is defaulted, the lender makes efforts to collect the money from the borrower by contacting them or selling the debt to an agency that collects the amount, collects money from the guarantor and takes legal action against the borrower.
Immediate Consequences of Payments Missing:
- If the payment is delayed by the borrower, then they should pay the penalty charges also.
- Interest keeps adding on unpaid balance. Due to which the outstanding balance also increases.
- If the payment is not made within 30 days, then it is reported to the credit bureaus, which will affect the credit score negatively
- A minimum of 50 points would be reduced, but the exact impact would depend on overall credit history.
- The creditworthiness of the borrower would be reduced.
- If the payments are delayed repeatedly, the chances of getting loans in future will be very less.
- Few lenders can also demand quick payments.
Also read: Personal Loan vs Credit Card Loan: Which One Will Save You the Most in 2025?
Long-Term Financial Impact:
- If there is a default on the loan, it will be reflected in the credit report for 7 years.
- There are high chances of loans getting rejected or will charge higher interest rates.
- Access to credit cards, BNPL, and loans will be denied.
- Getting financial support will be difficult.
- If the borrower owns a business, Investors might lose trust in the borrower.
Legal Consequences:
- If the borrower fails to repay the amount, the lender can take legal action to collect the amount.
- A legal notice can be issued demanding full repayment of money (which includes interest, penalties, and other charges).
- If the loan is a secured loan, the property can be auctioned.
- There are also high chances of freezing the salary account of the borrower.
- In some cases, it can also affect the borrower professionally,
How to Prevent Loan Default:
- It is important to make a monthly budget (should be realistic), which includes all the EMIs that are to be paid.
- It is better if an emergency fund is maintained, which at least covers the EMI of 3 to 6 months.
- Take the loan only if necessary.
- If the loan EMI should be less, it is better to choose longer tenures.
- Enable auto debit option, so that the payment will be made on time.
- It is better to give prior information to the lender if there is any default, so that they might help you.
What to Do If You’re Already Struggling to Pay?
- It is advisable to contact the lender as soon as possible, so that the lender can help if they can
- Ask for a loan reconstructing (reducing EMI and increasing the tenure, or pausing the payments for a few days)
- Consult the lender and ask for the grace period.
- Approach certified credit counselling agencies to negotiate with the banks.
- Reduce the other expenses, which are not important.
- Borrow from outside (from family, friends, relatives) and repay them later.
Conclusion
The effect of default on the payment of a personal loan lasts longer. It affects the credit score and reduces the creditworthiness of the borrowers. Acting early will still help the borrower. It is better to know these aspects, so that it does not affect much and can be solved as early as possible. It is also important to update the lender if there are any issues while repaying. It is always better to take proactive measures than to take reactive measures. Upon all these, it is better to be responsible and make timely payments, which will protect the financial health.
Written by N G Sai Rohith
