What are the Consequences or Punishment for Non-Payment of Personal Loan?

What are the Consequences or Punishment for Non-Payment of Personal Loan?

Personal loans are unsecured loans that are provided without any restrictions on the end-use. In recent years the demand for personal loans has increased drastically owing to the ease with which the personal loans are issued. Just because it is easily available and with a quick turnaround time, you should not get tempted and apply for one without thinking twice. You should consider your affordability and borrow only if the loan is necessary.

If you do not plan your finances and borrow erratically, there is a good chance that you will end up in a financial mess that will lead to defaults in repayment. Read on to understand the repercussions and punishment for non-payment of personal loans.

What Happens if Personal Loan EMI is not Paid?

After meeting Personal Loan Eligibility Criteria and submitting the loan documents, you commit to repay the loan within the tenure that you have opted for in equated monthly instalments (EMI). It means that you will have to pay a fixed amount on the set date every month. If you have not planned your finances meticulously or if you are unable to pay the personal EMI due to unavoidable circumstances, you will have to bear the brunt of the punishment for non-payment of personal loans.

• There will be reminders in the form of email, SMS, notification or a phone call from the lender if you miss out on even a single EMI. If the payment is still not made and the reasons for the non-payment are genuine, the lender may give you some extra time over and above the due date.
• Despite the extension of the deadline, if the EMI is unpaid, then you are liable to penalties. In addition to that, it will have a negative impact on your credit score.   
• The personal loan will be classified as a non-performing asset if the default continues and results in the non-payment of 3 EMIs in a row. The gravest punishment for non-payment of personal loans is the dip in the credit score. Every lender will keep the Transunion Cibil informed about the individual’s repayment behaviour. With every EMI you miss, your cibil score will lower by 50 to 70 points. A continuous delay in repaying your EMI will bring down your Credit Score drastically and may reduce your chances of getting further loans.

Legal Action & Punishment for Non Payment of Personal Loan

The personal loan will be classified as a non-performing asset if the borrower defaults beyond 90 days. If the loan is not repaid even after 180 days, the lender has the right to proceed legally against the borrower under Section 138 of the Negotiable Instruments Act 1881. Before proceeding legally, the lender will exercise all recovery measures like sending two reminders followed by a recall letter. The recall letter will be the final reminder wherein it will be specifically mentioned that the lender will proceed legally if the dues are not cleared within a specific date.

If the borrower appeals to the lender and gives valid reasons for the non-repayment, then the lender may provide options like restructuring of the loan. The restructure will make it convenient for the borrower to repay the dues.

On the other hand, if the borrower has diverted the funds and is wilfully avoiding the repayment of the loan or if the collateral is sold (in the case of secured personal loans) without the knowledge of the lender, then a criminal case will be lodged against the borrower as a punishment for non-payment of personal loan.

Though the lender has the right to take legal action against defaulting borrowers, there are certain rights that borrowers are eligible for. 

• Rights to Notice - Rights to know the facts of the case, i.e., the charges against the concerned party
• Rights to Fair  Value - Rights to know the value at which the asset is being sold
• ‘Rights to be Heard’ - the right to express their opinion.
• Rights to be treated politely - Rights to be treated with dignity.
• Rights to Claim the Balance - Rights to the residual value after appropriating the outstanding liability with the sale proceeds of the asset

It is recommended not to let the situation go to the extent of legal action. The penalty for delayed payment followed by legal fees could really pinch your pocket.

What happens if someone Defaults on Secured Loans?

Loans, where security like gold, property, LIC policies, NSCs etc. is offered, are called secured loans. The punishment for non-repayment of personal loans that are secured by way of mortgage of property or pledge of jewellery, LICP or  NSCs is quite different.  The initial recovery steps, like sending reminders, are similar to unsecured loans. When the borrower fails to respond to such reminders, the lender will send a notice to the borrower regarding the sale of the asset along with the date of auction. 

In the case of a mortgage of a property, after the loan is classified as Non-Performing Asset, a notice under the SARFAESI Act will be sent with sufficient time to repay the dues within the legal framework. If unpaid within the time permitted, the next step would be sending a notice stating that the property will be auctioned on a certain date. The reserve value set for the auction will also be mentioned. The time gap between the date of the notice and the date of the auction will be one month. If the borrower clears the dues within this time, the auction will be called off.

In case the asset is sold, the borrower will have the right to claim the residual value out of the sale proceeds after the entire dues have been paid off.

Impact of Non Payment of Personal Loan on Credit Score

The lender will keep the credit bureau informed regarding the repayment behaviour of individual borrowers. Every EMI that is missed will be recorded in the credit history of the borrower. There will be a dip in the credit score by 50 to 70 points each time. If the default continues consecutively for three months, the personal loan will be classified as a Non-Performing Asset, and the same will be reported to the credit bureau. This will have a drastic effect on the credit score and to the extent that it may become difficult for you to procure further loans.  It will negate your chances of availing of big-ticket loans like home loans.

It is therefore recommended to plan your finances prudently and borrow only if you need to and if you can afford it.

Consequences of Missing Personal Loan EMI Payments

Missing Personal Loan EMI payments have the following consequences. This is in addition to the punishment for non-payment of personal loan.

• Accumulation of liability: EMI concept was introduced to ease the burden of loan repayment. Missing personal loan EMI payments will defeat the purpose as it will lead to the accumulation of liability. Further, the penalty charged for such delays and missed payments will add up the cost of the loan, making it even tougher to clear the liability.
• Dip in the credit score: The minimum credit score required for easy approval of any loan or a credit card is 750. Your aim should be to maintain a credit score beyond 750 to fulfil bigger dreams like owning a home. Missing out on personal loan EMI payments will negatively impact the credit score, which will make it difficult for you to avail of big-ticket loans like home loans, and your dream of owning a home will remain a dream.
• Legal Action: You will be liable for legal action if you continue to miss personal loan EMI repayments beyond 180 days. The lender will give you sufficient relaxation in the form of extension of the EMI due date, providing a moratorium for the loan etc., and the ultimate recovery measure will be legal action.

How to Avoid Default or Non Payment of Personal Loan?

Non-payment of personal loans could be due to unforeseen circumstances like a temporary layoff, medical emergencies, loss in the business, etc.  It can also be due to unplanned financial commitments. There are several tactful ways of avoiding the default of personal loans.

• Well-planned budget: This is the most prudent way of avoiding personal loan default. Every lender provides a simple financial tool, i.e., the EMI calculator, to calculate the probable EMI for a certain amount, tenure, and interest rate. Plan the EMI vis-a-vis your monthly income, and you will be able to make seamless repayment of the loan till the end of the tenure.
• Discussion with the lender: Discuss your financial condition with your lender to get some relaxation in the form of an extension of the due date, or a moratorium, as the case may be.
• Make part payments: Make part payments whenever there are surplus funds to lower the EMI.
• Cut down on expenses: Plan your finances and cut down on unnecessary expenditures to save funds for the personal loan EMI.

Conclusion

Availing a personal loan is a financial commitment that has to be honoured seamlessly.  Planning the monthly budget to provide for the additional burden in the form of a personal loan EMI for tenure as long as 60 months is highly essential to avoid missing or delaying the EMI and save yourself from the punishment for non-repayment of personal loan.