Defaulting on personal loan: What are the adverse consequences? Find out

When you face some financial problem or hardship, you can explore the prospect of raising a personal loan. Typically, a personal loan is taken out for a number of reasons such as a medical emergency, buying a luxury item, renovating the house and even for travel.

However, one should make sure that the personal loan amount is not too big to be repaid easily. The loan repayment burden should be less than half of your monthly income. Here we discuss the consequences of defaulting on a personal loan.

Defaulting on a personal loan can have serious financial, legal, and personal consequences. For example, negative impact on credit score, financial penalties imposed by the lender and so on. Here’s what typically happens when a borrower fails to repay their loan:

Impact of loan defaults

I. Penalties and increased interest: Banks or NBFCs tend to impose penalties for missing EMI payments.

II. Impact on credit score and future loans: Negative impact on credit score: Even a single missed EMI lowers your credit score (or other credit scores), making it harder to get future loans or credit cards.

So, there could be rejection of loans in the future. Banks usually consider default history when approving loans.

III. Legal Consequences: The lender will issue multiple reminders and notices for repayment and there could be a legal action if the borrower fails to pay despite repeated warnings. In fact, lenders may even file a legal case.

IV. Settlement: If a borrower genuinely cannot repay due to financial distress, they can negotiate a settlement. Lenders may offer a one-time settlement, where a reduced amount is paid to close the loan. However, this damages your credit score.

What should you do if you are struggling financially?

I. Contact the bank: You should intimate the bank early and request EMI deferment or restructuring.

II. Prioritise repayments: You should reduce unnecessary expenses and allocate funds to clear your dues.

III. Consider a personal loan balance transfer: You can shift to a lower-interest lender to reduce EMI burden.

IV. Seek professional advice: You could seek advice from a financial advisor or credit counsellors to help plan repayment strategies.