What Happens If Personal Loan EMIs Are Not Paid

Failing to pay your Personal Loan EMIs can have serious consequences. From late fees and credit score damage to potential legal action, the impact can be far-reaching. Let’s explore what it means to default on your EMI payments and the repercussions that follow.

If you miss paying your loan EMI on time, you are considered a defaulter. However, many lenders provide a ‘grace period’ after the due date. If you clear your EMI within this grace period, you may avoid being labelled as a defaulter. The grace period varies from one lender to another. But once this period ends, failure to pay leads to additional fees, a negative impact on your credit score, and potentially more serious consequences.

Defaulting on your EMI payments can result in the following outcomes:

Impact on Credit Score and Credit Report

Lenders usually report your repayment details, including EMI amounts and any delays, to credit bureaus like CIBIL. A single missed payment might only slightly impact your score, but multiple defaults can significantly lower it. A reduced score can make it difficult to secure loans in the future, as lenders may view you as a risky borrower.

Extra Charges and Late Fees

Missing your EMI payment can attract extra charges. Lenders typically charge a late payment fee if the EMI is paid after the due date. Delaying further beyond the grace period can lead to higher penalties, increasing the overall cost of the loan. It’s important to be aware of these additional costs, as they can accumulate quickly if not addressed promptly.

Reduced Future Borrowing Capacity

When you default on loan payments, your credit score drops, making it harder to qualify for loans in the future. Even if a lender does approve your loan, they may offer a smaller loan amount or charge a higher interest rate due to the perceived risk. In some cases, repeated defaults may disqualify you from receiving any loan approvals.

Loss of Assets Pledged as Collateral

While personal loans are typically unsecured, some lenders may ask you to pledge collateral (such as property or investments) for higher loan amounts. If you repeatedly default on your loan, the lender may seize the collateral to recover their losses.

Potential Legal Implications

In extreme cases, when multiple recovery attempts have failed, a lender may file a civil suit to recover the loan amount. The legal process can be lengthy, stressful, and financially burdensome.

Impact on the Guarantor

If your personal loan has a guarantor, your missed EMI payments can affect them too. The guarantor may be held liable to repay the loan, and their credit score will also be negatively impacted. This can put a strain on your relationship with the guarantor and create financial difficulties for them.

If you find yourself unable to pay your EMIs on time, here are a few steps to take:

Contact Your Lender

Inform your lender as soon as possible. Some lenders may offer an extension or restructuring of the loan to help you manage payments better.

Consider a Loan Restructuring

Many lenders offer restructuring options where the loan terms are adjusted to reduce monthly payments or extend the loan tenure. This can give you breathing room to recover financially.

Negotiate a Settlement

In some cases, lenders may offer a one-time settlement for a reduced amount to close the loan. Be aware that this can still affect your credit score, but it may be better than having a long-standing default on your record.

Explore Refinancing

If possible, consider refinancing the loan with another lender at better terms. This could lower your EMI or interest rate, helping you stay on track with payments.

Seek Professional Advice

Financial counsellors or credit repair agencies can provide guidance on how to manage your debt and avoid further damage to your financial health.

The Reserve Bank of India (RBI) provides certain guidelines to protect borrowers from harassment by lenders. Here are some key guidelines:

Fair Practices Code

Lenders must follow the regulations mentioned under RBI’s Circular DBOD.Leg.No.BC.104/ 09.07.007 /2002-03 dated May 5, 2003.  It covers ‘Guidelines on Fair Practices Code for Lenders’ which talks about transparency, post-disbursement supervision, and other generic guidelines.

Loan Recovery

Lenders must not use forceful recovery practices. Borrowers should be given notice before the initiation of recovery proceedings.

Grievance Redressal

Borrowers have the right to approach the lender's grievance redressal system if they face issues with repayment or recovery

Loan Settlement Offers

In case of a genuine inability to repay, borrowers can request a one-time settlement. The terms should be agreed upon by both parties.

Credit Counselling Services

RBI encourages borrowers to use credit counselling services to better manage their debt

 

Alongside this, there are some regulations as stated under the  'Code of Bank's Commitment to Customers' (BCSBI Code) about the collection of dues which must be adhered to. These include:

• You will be contacted at the place of your choice. If no place is specified, the lender will contact you at your home, and if unavailable, at your workplace.

• The recovery agent will clearly identify themselves and their authority to act on behalf of the lender

• Your privacy will always be respected

• The recovery agent will interact with you in a polite and professional manner

• The lender or recovery agent will usually contact you between 7 am and 7 pm unless your work or business requires a different time

• If you ask the lender not to call at specific times or places, they will try their best to honour your request

• The lender will record the time, number of calls, and details of their conversations with you

• The lender will help resolve any disputes or issues about payments in a fair and respectful way

• When visiting your location to collect payments, the recovery agent will not harass, threaten, or embarrass you or your family and friends. 

• If the lender cannot reach you, they may use public information or contact your friends or relatives. Thus, it’s your responsibility to keep your contact details updated. 

• The lender will avoid contacting you during inappropriate times, such as family bereavement or important events like weddings.

• The lender will investigate any complaints you have about unfair practices by their recovery agents