What if I Don't Pay the EMI of a Personal Loan?
You can make use of a personal loan for any purpose such as higher education, small home renovation works, daughter’s wedding, big-ticket purchase, exotic vacation, or even in cases of a medical emergency. But when you take a personal loan, you have to repay it along with applicable interest rates in instalments over the loan tenure. And you need to be disciplined for this.
Do you know what happens if a personal loan is not paid? What action can a lender take in case of non-payment of a personal loan? Or will the defaulter go to jail?
Before we jump to the consequences of failing to repay a personal loan, let’s understand the types of defaulters.
1. Careless borrowers: Careless borrowers include the individuals who take an excessive personal loan without analyzing their EMI/NMI ratio i.e., income/ expense balance before getting a personal loan. These people can’t collect the money to repay the loan when the payment due date approaches, and hence default on the loan.
2. Wilful defaulter: A wilful defaulter is a person or entity who does not pay back the loan despite his ability to repay it. Wilful defaulters try to game the lender and think they can mislead lenders by giving a false explanation for non-repayment. As per the RBI regulation, wilful default takes place due to a variety of reasons- deliberate non-repayment of the loan despite adequate cash flow, siphoning off the funds to the defaulting unit, misutilization of assets and proceeds, and fraudulent transactions by the borrower. Wilful defaulters are booked under Section 420 of the Indian Penal Code and maybe jailed.
3. Genuine defaulter: There are some people who have been paying their EMIs regularly on time for a long time, but are not able to pay back the loan any more due to some genuine reasons, such as job loss, medical emergency, inadequate cash flow, and a lot more. Borrowers who face genuine problems have their rights and can not subject to any kind of torture whatsoever by the lender.
Severe consequences of failing to repay a personal loan
1. Your credit score will suffer: When a borrower applies for a loan or credit card, all credit related information of the loan borrower and credit card user is sent to CIBIL and other credit bureaus. Hence, if a borrower defaults on a personal loan or a credit card, it will take a heavy toll on the borrower’s credit score. As a result, the defaulter will face problems or won’t be able to get a loan or credit card in the future.
2. Follow-up from the lender: The follow-up begins as soon as you miss a single installment. The bank will make follow-ups with the borrower through letters or emails mentioning the amount overdue with interest and penal charges. Some legal actions can follow failure to repay your loan for more than 3 months.
3. Seizure of collateral: In case of a secured personal loan, the bank can liquidate the asset, you offered as collateral while applying for a personal loan, to recover the principal and interest. If there is a co-applicant or guarantor, as per the guarantor agreement, the bank can approach and oblige the guarantor to repay the loan when the principal applicant defaults.
4. Legal proceedings: If you fail to repay the loan despite many reminders, it will prompt the lender to bring legal proceedings against you. The bank can block your savings account or even can file a criminal case against you.
5. Use of post-dated cheques: Banks usually keeps signed, undated cheques at the time of granting a loan. When you default on the loan payment, banks can present the signed cheques for clearance. In case of cheque dishonour, the bank can file a criminal case against you under Section 138 A of Negotiable Instrument Act. and arrest can be made as per the rule.
Therefore, if you are unable to make a payment to the bank due to some financial issues, it is highly recommended for you to talk to your lender and negotiate the issue.
How to negotiate an unpaid loan?
If you are facing some financial problems, proactively contact the bank or NBFC from which you have obtained the loan. If your lender is an RBI certified loan provider and if you inform it in advance about your financial problems, the bank would do everything to assist you and you won’t get into trouble. Banks can help you in a few ways described as under:
1. Lower the EMI: If you are not able to repay the loan on time, the bank can lower the EMI by increasing the loan tenure known as loan rescheduling of restructuring. Reducing EMI may help you repay the loan with a small amount. However, loan tenure can not be extended by a specific limit.
2. Conversion of unsecured loans to secured loans: The bank can convert an unsecured loan into a secured loan to lower the EMI.
3. EMI free period: If you are not able to repay the loan due to inadequate cash flow, this type of facility can help you. In case of job loss, loss in business, medical emergency, unavoidable expenses, the bank may agree to waive off the EMI collection for a specific span of time, say 2 to 8 months. After your cash flow comes on the track, you can resume the EMI payment. However, the inability to repay a loan for a longer time will affect the good relationship between you and the lender.
4. Loan settlement: Sometimes, a borrower may not be able to pay off the loan now and in the future. But he is willing to settle the loan by paying a part of the loan once and for all. The bank can accept this offer because this bank can at least recover some part of its loan. However, due to loan settlement, your credit score will suffer a lot.
What to do if you have missed your EMI during Covid 19 lockdown?
RBI has announced that “All banks and NBFCs have been permitted to allow a moratorium of 3 months on the EMIs repayment of term loans outstanding on March 1, 2020”. The decision is aimed to mitigate the impact of the lockdown on borrowers. In case if you have missed your loan EMI during this lockdown, you can pay it in the subsequent month or can defer further by 3 months. It will not impact your CIBIL score negatively.
However, it has been clearly stated that interest for these 3 months will be compounded and will be recovered by extending the tenure of the loan. You will have to shell out additional interest if you have missed out on an EMI or choose to defer it by 3 months due to the lockdown. This will depend on the tenure of your loan and if you can pre-pay your loan.