The punishment for non payment of Personal Loans in India (2024)

A personal loan is an amount of money you can borrow to spend for a variety of purposes. For example, you may utilise a personal loan to consolidate debt, pay for home improvements, or arrange your dream wedding. Personal loans are available through banks, credit unions, and online lenders. Borrowed funds must be repaid over time, generally with interest. Personal loans may also be subject to fees from some lenders. If you have taken out a personal loan in India, you should be aware of the repercussions of not repaying it. Failure to return your debt might result in severe financial consequences, including legal action.

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

Personal loans are unsecured loans with no restrictions on their intended use. Because of the simplicity with which personal loans are given, the demand for personal loans has skyrocketed in recent years. You should not be lured to apply for one simply because it is easily available and has a rapid turnaround time. You should think about your affordability and borrow only if it is absolutely required. If you do not organise your finances and borrow haphazardly, you are likely to find up in a financial disaster that will result in payback default.

Legal Action and Punishment for Personal Loan Nonpayment

If the borrower defaults after 90 days, the personal loan will be categorised as a non-performing asset. If the loan is not repaid after 180 days, the lender has the legal authority to sue the borrower under Section 138 of the Negotiable Instruments Act of 1881. Before going to court, the lender will use all available recovery methods, such as sending two reminders followed by a recall letter. The recall letter will be the final reminder, and it will expressly state that if the dues are not cleared by a certain date, the lender will continue legally.

If the borrower appeals to the lender and provides valid reasons for non-payment, the lender may offer options such as debt modification. The restructure will make it easier for the borrower to repay his or her debts.

However, if the borrower has diverted funds and is intentionally evading loan repayment, or if the collateral is sold (in the case of secured personal loans) without the lender's knowledge, a criminal case will be filed against the borrower as a punishment for non-payment of personal loan. Though the lender has the power to take legal action against defaulting borrowers, borrowers do have certain rights.

• Notice Rights - The right to know the facts of the case, i.e., the allegations levelled against the concerned person.
• Rights to Fair Value - the right to know the price at which an item is sold.
• 'Rights to be Heard' - the right to voice one's opinion.
• The right to be treated graciously and with dignity.
• Rights to the Balance - The right to the residual value after appropriating the
• outstanding liability with the asset's sale profits.
• In India, how does the lender compel repayment of a personal loan?
• If you fail to return your debt, the lender may sue you in court. The court will then order that you repay the full amount or risk other penalties such as wage garnishment or asset seizure. If payments are late, the lender may report the loan to credit bureaus and send debt collectors after you.
• Secured loans are those that include security such as gold, property, LIC insurance, NSCs, and so on. The penalty for failing to repay personal loans secured by a mortgage or pledge of jewellery, LICPs, or NSCs is quite different. The earliest measures of recovery, such as sending reminders, are comparable to those of unsecured loans. If the borrower does not react to such reminders, the lender will notify the borrower of the asset's sale and the date of auction. In the instance of a property mortgage, a notification under the SARFAESI Act will be sent with ample time to repay the dues within the legal framework after the loan is classed as a Non- Performing Asset. If the payment is not received within the time frame specified, a notice specifying that the property will be auctioned on a specific day will be sent. The reserve price for the auction will also be stated. One month will elapse between the date of the notification and the date of the auction. If the borrower pays his or her debts within this time frame, the auction will be cancelled.
• If the asset is sold, the borrower will be entitled to the residual value from the sale profits after all dues have been paid.
• The Effect of Personal Loan Nonpayment on Credit Score
• The lender will keep the credit bureau updated on specific borrowers' repayment behaviour. Every missed EMI will be documented in the borrower's credit history. Each time, the credit score will drop by 50 to 70 points. If the default persists for three months, the personal loan will be categorised as a Non-Performing Asset, and the credit bureau will be notified. This will

have a significant impact on your credit score, making it difficult for you to obtain additional loans. It will eliminate your prospects of obtaining large-ticket loans such as home loans. It is therefore advised to organise your finances cautiously and borrow only when absolutely necessary and if you can afford it.

What Happens If You Don't Pay Your Personal Loan EMI?

After meeting the Personal Loan Eligibility Criteria and submitting the loan documentation, you agree to repay the loan in equivalent monthly instalments throughout the specified period (EMI). It means you'll have to pay a predetermined amount on a specific date each month. If you have not precisely arranged your finances or are unable to pay the personal EMI due to unavoidable circ*mstances, you will suffer the weight of the penalty for non-payment of personal loans.

If you miss even one EMI, the lender will send you a reminder via email, SMS, notification, or a phone call. If the payment is still not made and the grounds for the non-payment are genuine, the lender may grant you some further time beyond the due date.

Even if the deadline is extended, if the EMI is not paid, you will face penalties. Furthermore, it will have a negative impact on your credit score.

If the default continues and three EMIs are missed in a row, the personal loan will be designated as a non-performing asset. The most serious penalty for failing to repay personal loans is a drop in credit score. Every lender will keep Transunion Cibil updated on the individual's repayment history. Your cibil score will drop by 50 to 70 points for each EMI missed. A continuous delay in repaying your EMI can significantly lower your credit score and may reduce your chances of obtaining more loans.

The Effects of a Missed Personal Loan Payments by EMI

Personal Loan Is Missing The following are the effects of EMI payments. This is in addition to the penalty for failing to repay a personal loan.

•Liability accumulation: The EMI concept was established to alleviate the strain of loan repayment. Missing personal loan EMI payments defeats the objective because they result in the accumulation of liabilities. Further, the penalty levied for such delays and missing payments will add up the amount of the loan, making it considerably tougher to clear the debt.

• A drop in credit score: A credit score of 750 is essential for easy approval of any loan or credit card. Your goal should be to keep your credit score above 750 in order to realise bigger aspirations like acquiring a home. Missing personal loan EMI payments will have a bad influence on your credit score, making it harder to obtain large-ticket loans such as home loans, and your desire of buying a home will remain a dream.
• Legal Action: If you continue to skip personal loan EMI repayments beyond 180 days, you will face legal action. The lender will provide you with adequate relief in the form of an extension of the EMI due date, a moratorium on the loan, and so on, but the final recovery measure will be legal action.
• How to Avoid Personal Loan Default or Nonpayment?
• Nonpayment of personal loans may be due to unanticipated situations such as a temporary layoff, medical difficulties, business loss, and so on. It could also be owing to unanticipated financial obligations. There are various deft methods for preventing personal loan default. Budget preparation: This is the best approach to avoid personal loan default. Every lender offers a simple financial tool, the EMI calculator, to determine the likely EMI for a given 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 to the end of the period.
• Conversation with the lender: Discuss your financial situation with your lender to obtain some relief in the shape of a due date extension or a moratorium, as the case may be.
• Make part payments: Make part payments anytime you have extra money to minimise your EMI.
• Reduce your expenses: Plan your finances and eliminate unnecessary expenses to save money for the personal loan EMI.

Conclusion

• A personal loan is a financial obligation that must be met in full. Planning the monthly budget to account for the increased load of a personal loan EMI for a tenure of up to 60 months is critical to prevent skipping or delaying the EMI and avoiding the penalty for non-payment of a personal loan.