While defaulting on your personal loan is not an ideal situation, it is quite possible. So, whether you are considering taking a personal loan and are wondering what the consequences of defaulting are or already have a personal loan and are faced with a financial emergency and may not be able to meet your Equated Monthly Instalment (EMI) obligation, here is what you need to know.
- A personal loan is an unsecured loan unlike a home loan or loan against property. This means that when you default on your personal loan, there is no immediate threat to any of your assets because the bank cannot seize them and recover their dues from them. In order to do this, the bank will first have to press legal charges.
- The most immediate impact of missing out on a personal loan EMI will be reflected in your credit score. If your EMI payment is overdue by 30 days, this will appear in your credit report. Payments that are overdue for 60 to 90 days are considered a serious default and the credit bureau will be alerted by the bank. This will immediately impact your credit rating and will be reflected in any future loan applications you make.
- Another thing that happens when you default on a personal loan EMI is that your financial burden will increase because your bank will charge late fees and penalties.
- When you have defaulted on your personal loan EMI for three consecutive months or 90 days, the bank will then classify the loan as a Non-Performing Asset (NPA). The bank will only proceed with legal proceedings once your loan has been classified as an NPA.
- Even after this, the bank will give you a notice of 60 days to clear your outstanding dues before they start the legal proceedings. Hence, ideally, this is the time when you should try to settle your dues. Once this matter is taken to the court of law, things get complicated.
- If you communicate with your bank and explain your financial situation, convincing them that the defaults were temporary before they proceed with legal action, your bank may delay legal action. Essentially, you will have to convince your bank that EMI payments will once again become regular.
- While personal loans are unsecured loans, there may be a bankers’ lien on certain assets such as fixed deposits, mutual funds, stocks, etc. In case of a lien, you cannot sell these assets until you have cleared your personal loan EMI dues.
While legal action is never a bank’s first mode of resolution, eventually if you fail to communicate with the bank and clear off your dues within the notice period, the bank will file a suit. This is why it is crucial to consider your loan affordability and see whether you can comfortably pay the EMIs regularly before you take a personal loan. To determine this, you can make use of helpful online tools such as the personal loan EMI calculator. Always have a repayment plan in place before you take a loan and in case you find yourself in a financial emergency where you could not help but miss an EMI payment, make sure to clear that due on priority.