Can’t Pay Your Personal Loan ? Here’s The Financial And Legal Consequences You Should Know

Personal loans are a convenient way to cover your urgent expenses and major purchases. However, failing to make a payment on time could lead to severe consequences from decline in credit score to legal action from the lender. Understanding the consequences might help you to manage the situation better and avoid any long-term financial setbacks.

Personal Loan Default Consequences

Possession of collateral - If you have taken out a secured personal loan guaranteed by a collateral, then chances are you might lose it as the lender has to right to repossess the asset once you have missed a few payments. In certain circumstances, the lender can even directly repossess the asset without even informing you or getting a court order.
Impact on credit score - Credit score depends on your ability to pay back the loan, credit utilization and payment history. When you fail to make payment, it negatively impacts your credit score, which might make it difficult for you to obtain loan in the future.

Additional charges - Default on personal loans invite additional fees and penalties, including late payment fees, bounced check fees, legal fees, and additional interest charges. These extra charges significantly increase the financial burden on the borrower.

Blacklisting - If the default on personal loans goes beyond certain limit, then the lender might report the matter to credit bureaus, resulting in a significant drop in your credit score. Additionally, it can negatively impact your ability to secure future loans or credit cards as lenders might view you as a high-risk borrower.

Negative impact on co-signer - Defaulting on personal loans not just affect you, it could also have similar consequences on your co-signer. Since both share a similar responsibility, the missed payments will also be reflected on their credit score. They might also face legal actions, holding them liable for repaying the outstanding debt.
Legal Actions - In India, default on personal loans is considered as a breach of contract, giving the lender the right to file a lawsuit against the borrower.

If the lender files a civil lawsuit against you, then court might ask you to repay the outstanding debt as well as additional penalties. In certain cases, the court might allow the lender to repossess your assets or property to recover the loan amount.

Meanwhile, if the lender files a criminal lawsuit against you, then you could face imprisonment for up to two years under Section 420 of the Indian Penal Code (IPC). This provision applies in the situation where the borrower is found to have 'cheated' the lender by intentionally providing false information or misrepresenting their financial status to obtain the loan.

How To Mitigate Personal Loan Default Consequences ?

If you believe that you are at a risk of missing payments on your loan or have already defaulted, then it is important to act quickly to minimize the consequences and explore possible alternatives.

What You Can Do

Check your financial situation - Before opting for any alternative, you should first assess your financial situation by checking your budget for non-essential spending. You can also look for another source of income such as a part-time job or a freelance work.

Consult a credit counsellor - Credit counselling agencies can help you to negotiate with your lenders. They would also guide you in making a detailed financial plan to repay the outstanding debt.

Contact your lender - Take a proactive approach and contact your lender to explain your credit situation. You can explain to them about your financial hardships and request options such as restructuring or modifying your debt repayment terms to make it more manageable.

Loan against assets - If you have any assets such as gold or property, you can borrow a loan against it to repay your outstanding personal loan.