What are the consequences of defaulting on a personal loan?

Defaulting on personal loan can lead to a series of serious financial, legal, and personal consequences, especially as per the latest guidelines in June 2025. Here’s what typically happens if you miss your loan repayments:

• Immediate Penalties and Charges: Lenders usually impose hefty late payment penalties and additional charges for every missed EMI. Over time, these fees can significantly increase your overall debt making it even harder to clear the outstanding amount.
• Credit Score Impact: Every missed payment is reported to credit bureaus. Even a single default can cause your credit score to drop sharply, making it more difficult and expensive to get loans or credit cards in the future. Your credit report may show defaults for upto seven years.
• Legal Action: If you continue to miss payments, lenders may issue formal notices and, in persistent cases, initiate legal proceedings under the Negotiable Instruments Act or other civil laws. While imprisonment is rare and not a direct consequence, the court may allow lenders to garnish wages or seize assets in extreme cases.
• Recovery Agents: Lenders may appoint recovery agents to collect dues. These agents must follow RBI’s ethical guidelines and cannot use harassment or intimidation.
• Co-applicant/Guarantor Impact: If your loan has a co-applicant or guarantor, they become equally liable, and their credit scores can also be affected.

If you’re facing genuine hardship, it’s best to communicate with your lender early. Lenders may offer restructuring, payment deferral, or a one-time settlement, though settlements can also harm your credit score.