Personal loans can provide a quick and easy solution to immediate financial needs in India. It provides borrowers with flexibility and ease of access to funds, but it also comes with the risk of default. However, when borrowers default on their personal loans, it can result in severe consequences. This article will explore the various legal and financial repercussions that borrowers in India may face if they fail to repay their personal loans including legal action, penalty charges and negative impact on credit scores.
Key Highlights:
- A credit score ranges from 300 to 900. In this calculation, the borrower's credit history, payment behavior and credit utilisation are considered.
- As per the RBI guidelines, genuine defaulters should not be hassled and should be given some time for recovery.
- The borrower can negotiate with the lender to restructure the loan repayment schedule, reduce the interest rate or waive off the penalties.
- The borrower will have to file a petition for bankruptcy with the National Company Law Tribunal (NCLT), which will appoint an insolvency professional to oversee the bankruptcy proceedings.
The Consequences of Non-payment of a Personal Loan in India
Impact on Credit Score
When a borrower fails to repay a personal loan, it can have a negative impact on their credit score. A credit score ranges from 300 to 900. In this calculation, the borrower's credit history, payment behavior and credit utilisation are considered. The credit score of a borrower can suffer a significant drop if they default on a loan. With a low credit score, individuals may have difficulty obtaining loan in the future, since lenders are more likely to reject their loan applications.
Legal Action
If a borrower fails to repay a personal loan, the lender may take legal action against them. This can include filing a case in court, sending legal notices or hiring a collection agency to recover the loan amount. Legal action can be costly and time-consuming and it can also damage the borrower's reputation.
Additional Charges
When a borrower defaults on a loan, they may be charged additional fees and penalties. These charges can include late payment fees, bounced check fees and legal fees. The borrower may also be charged interest on the overdue amount. These extra charges can significantly increase the total amount owed by the borrower.
Collateral Seizure
As personal loans are unsecured loans, the lender cannot seize collateral if the borrower defaults on the loan. Lenders may seize property or collateral provided by the borrower as security to recover the loan amount. As a result, the borrower may lose their valuable asset.
Negative Impact on Co-Signer
Borrowers who co-sign for their personal loans share responsibility for repayment with their co-signers. The co-signer can suffer a negative impact on their credit score if the borrower defaults on the loan. Legal action may also be taken against the co-signer.
Difficulty in Obtaining Credit
A defaulted personal loan can make it difficult for the borrower to obtain credit in the future. If you have a history of defaulting on loans, lenders are more likely to reject your loan application. As a result, the borrower may have financial difficulties in the future, as they may not be able to obtain credit when they need it.
Blacklisting the Borrower
The lender may report the borrower's non-payment of the loan to credit bureaus, which may result in the borrower's credit score being lowered, making it difficult for them to obtain loans or credit in the future.
Legal Action & Punishment for Non Payment of Personal Loan
In India, non-payment of personal loans is considered a breach of contract and the lender has the legal right to take action against the borrower. The lender can initiate legal proceedings against the borrower, which may lead to a civil lawsuit or criminal case.
If the lender files a civil lawsuit against the borrower, the court may order the borrower to pay the loan amount along with interest and penalties. In some cases, the court may also order the seizure of the borrower's assets or property to recover the outstanding loan amount.
If the lender files a criminal case against the borrower, the borrower may face imprisonment for a period of up to two years under Section 420 of the Indian Penal Code (IPC). However, criminal proceedings are only initiated in cases of fraud or misappropriation of funds.
Can a Borrower File for Bankruptcy if they can’t Repay their Personal Loan in India?
- Yes, a borrower can file for bankruptcy if they are unable to repay their personal loan in India. However, the process of filing for bankruptcy in India is lengthy and complex.
- The borrower will have to file a petition for bankruptcy with the National Company Law Tribunal (NCLT), which will appoint an insolvency professional to oversee the bankruptcy proceedings.
- The borrower's assets will be liquidated to repay the outstanding loan amount and the borrower may be discharged from the debt if the insolvency professional finds that the borrower is unable to repay the loan amount.
Personal Loan Default Guidelines by the RBI
In India, the Reserve Bank of India regulates and supervises banks and financial companies. It serves as the pillar of the Indian financial system when it comes to safeguarding the economic interests of the people, the banks and the country.
The RBI issues frequent circulars containing specific instructions to banks/financial companies or the general public. These are the RBI guidelines for personal loan defaulters who would like to avoid persecution by their banks or their recovery agents:
- Customers should be informed of all loan terms before applying for a loan. An instalment agreement should specify the amount credited, the interest rate, the payment duration and the action to be taken if payment is not made.
- Loans shouldn't be discriminated against based on sex, caste, or religion by the lending bank or financial company.
- Borrowers should be given at least 30 days' notice before their accounts are reviewed.
- Genuine defaulters should not be hassled and should be given some time for recovery.
- Customers should not be subjected to undue harassment by the recovery agents hired by lenders.
- A borrower cannot rely on muscle power to recover a loan against a defaulter.
- Visits to defaulting customers can be made to their places of stay or work, as specified by them.
- Loan defaulters should be contacted during specified hours, or between 7 am and 7 pm.
Are there any other options available to borrowers who are struggling to repay their loans in India?
If a borrower is struggling to repay their personal loan in India, they can consider the following options:
- Negotiating with the lender: The borrower can negotiate with the lender to restructure the loan repayment schedule, reduce the interest rate or waive off the penalties.
- Taking a loan against assets: The borrower can take a loan against their assets, such as gold or property, to repay the outstanding personal loan.
- Seeking help from a credit counseling agency: The borrower can seek help from a credit counseling agency to manage their debts and create a repayment plan.
To Wrap Up
Defaulting on a personal loan can have several consequences, including legal action, punishment for non-payment, debt collection harassment and negative impact on credit score. Lenders can take legal action against defaulters and report them to credit bureaus, leading to a negative impact on credit scores. Borrowers should explore all available options to repay their loans, such as negotiation with the lender, debt consolidation and seeking credit counseling services. It is crucial to be aware of the consequences of defaulting on a personal loan and make an informed decision before borrowing. Check your eligibility for your personal loan by visiting Shriram Finance.
FAQs
What are the rights of a loan defaulters in India?
Loan defaulters in India have certain rights such as the right to receive a notice from the bank before the loan is declared a Non-Performing Asset (NPA), the right to request a restructuring of the loan and the right to approach the Banking Ombudsman for grievance redressal.
Can bank recovery agents come to home?
Bank recovery agents can come to a defaulters' home to recover outstanding loan amounts, but they must follow certain rules and regulations while doing so. The agents cannot use force or intimidation and they must provide proper identification and a copy of the recovery notice.
How do I stop loan app harassment?
Loan app harassment can be stopped by filing a complaint with the concerned authorities or through legal action. Loan companies and their recovery agents are prohibited from using abusive language, threatening/harassing borrowers or disclosing their personal information.
Can loan companies contact your workplace?
Loan companies may contact a borrower's workplace for loan recovery, but they cannot disclose any information about the loan to co-workers or superiors. Additionally, the loan company must follow certain guidelines while communicating with the borrower's employer and cannot engage in harassment or intimidation.
