What Should You Do When You Default on Your Personal Loan?
You may have chosen to apply for personal loans to cover urgent financial requirements or other needs. However, what happens when you default on them? Personal loan defaults can have severe consequences, if not managed well. Here is a brief look at the consequences and some tips on how to manage defaults better.
Consequences of Personal Loan Defaults
Here is a round-up of what may happen if you default on your personal loan from a small finance bank or any other financial institution.
| Credit Score Impact | Higher Interest Rates & Fees | Legal Action & Collections | Impact on Cosigner |
| Your credit score will be negatively impacted | Defaults may lead to higher charges and penalties | Lenders initiate collection measures as a last resort for recovering the pending amount | If you have a cosigner for your personal loan, then his/her credit score will be negatively affected |
| Lenders will report missed payments to credit bureaus after the completion of the grace period, which is usually 30 days | Late payment fees may be imposed by lenders | You will initially receive SMS-es, phone calls, and emails in this regard | Legal action may be taken against the cosigner by the bank in case the loan is not cleared |
| This information will remain for several years on your report, making it harder to get loans in the future | Loan interest rates may increase, scaling up the financial burden on you | Collectors may contact you persistently, adding to your daily stress | The cosigner may not be in a position to repay the loan on your behalf |
| If deemed necessary, legal action may be pursued by the lender against you, resulting in lawyer charges and other costs |
RBI Guidelines on Personal Loan Defaults
There are a few guidelines issued by the RBI regarding personal loan defaulters. These include:
- Lenders should adopt a fair process of recovery while avoiding abusive or harmful practices. They should ensure that debt collection endeavors do not lead to undue harassment/embarrassment for borrowers in public and private.
- A notice period is mandatory before banks take any legal action. It will help borrowers get more time to repay the debt or dispute the claimed amount. Legal action should be the last resort for banks and never the first response.
- Loan restructuring is always encouraged, including changing the repayment terms and adopting other measures to temporarily relieve borrowers.
How to Manage Defaults Better
Here are some ways in which you can manage personal loan defaults in the best possible manner.
- Lenders may be open to renegotiations regarding the loan terms. Some options include increasing the loan tenure, offering a temporary pause/holiday on payments, and lowering interest rates.
- Early communication with the lender is essential regarding your loan default and inability to repay, based on genuine financial need. You can ask for guidance on alternative options, settlements, or loan restructuring to manage the situation better.
- You can ask the lender for a loan restructuring or consolidation option to manage the repayment process more comfortably.
- You may also get assistance from a credit counseling agency to manage your debts better while structuring a plan for repayment accordingly.
- Another option is taking a loan against assets like property or gold to repay the outstanding amount in dire situations.
Conclusion
As you can see, there are ways and means to manage loan defaults if you act proactively and communicate properly with the lender. Do not panic and take a calm approach towards working out the best possible solution to the crisis with your lender’s guidance and cooperation.
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