When you borrow money from a bank or a lending agency in India, you agree to pay it back in monthly instalments called EMIs. But life is unpredictable, and you might face hardships that stop you from meeting these commitments. So what happens if you fail to pay your loan EMIs? Here are the stages of legal fallout you could experience if you default on a personal loan in India.
You get a legal notice
First, if you miss your loan payments, expect a lot of calls and reminders from your lender. Skip multiple instalments, and you will receive a formal warning in writing, known as a legal notice. This document spells out that you must pay your due EMIs. It also warns you of the serious outcomes you might face if you keep ignoring your loan obligations.
Debt collectors knock on your door
Don’t respond to the legal warning? Your lender can then turn to debt collection agencies for help. These agencies possess full rights to employ a variety of tactics to get money from you. Sometimes, they employ aggressive negotiation methods. While these agencies aim to recover unpaid loans, they must also follow rules and regulations so that their actions remain within the law.
A court case could happen
Loan defaults are a civil offence. So, when things get worse, your lender might take you to court. Here, you will need to defend why you couldn’t pay back the money. If you fail to defend yourself well in court, the court might order your assets seized to pay back the loan. This may be the lender’s last option as it takes time and money to go through the court proceedings. However, it is a powerful tool for the lender to recover their loan.
Your credit score takes a hit
Miss out on your loan repayments and your name will make its way into the records of credit bureaus as a defaulter. This negative record stays on your credit report for many years. With a bad credit report, getting new loans or credit cards becomes difficult, as lenders may consider you a high-risk borrower. In case you succeed in obtaining loans, your interest rates for future loans may not be favourable.
How to reduce the chances of personal loan default?
- Borrow what you can afford: Use a personal loan EMI calculator to borrow a reasonable amount. Plug in different loan amounts, interest rates, and tenures. The tool will show you the future EMIs you need to pay on the amount you have borrowed. By using different variables, you can pick a loan amount that is within your financial means. With the right numbers, you may avoid the trap of borrowing more than you can handle and create a practical repayment plan.
- Create an emergency fund: Always have some savings set aside for a rainy day. These funds can be your saviour during a financial crisis, helping you meet your loan payments when times get tough.
- Opt for a longer tenure: Sometimes, it’s easier to manage smaller payments over a longer time. So consider a longer loan term if that eases your monthly burden.
- Communicate with your lender: If you anticipate payment issues, talk with your lender. Many may work out easier payment options rather than jumping to legal actions.
A loan default not only affects your present financial stability but could also ruin your future credit opportunities. So, when you apply for a personal loan from banks, take your repayment responsibilities seriously. By being mindful and responsible when borrowing, and having a clear repayment plan, you can avoid damaging your credit score, facing legal actions, and straining relationships.