Personal loans are unsecured loans that can be used for any purpose. Due to the ease with which personal loans are granted, the demand for them has dramatically expanded in recent years. You shouldn’t give in to temptation and apply for one without considering just because they are readily available and have a rapid response time. You should take into account your ability to pay and only take out a loan if it is really essential.
There is a considerable risk that you will find yourself in a financial disaster that will result in payback defaults if you don’t budget your money and borrow carelessly. Continue reading to learn about the consequences and penalty for personal loan default.
Few people understand how crucial it is to pay back loans obtained through banks, NBFCs, or internet lenders. Making the payments on time is mostly the borrower’s obligation. If you don’t, you can be prevented from obtaining loans in the future when you most need them. Additionally, there are some who willfully choose not to make their required repayments.
Know your Rights as a Loan Defaulter
Banks and Financial institutions have a liability to follow a process when handling a loan defaulter. In case of default on repayment of a secured loan like a home or car loan, the biggest worry of a borrower is that they would have to part with the financed asset like the house, car etc. However, borrowers should know that even upon default, they have certain basic rights which cannot be overlooked by the lender. In this article, we’ll discuss the rights of a loan defaulter and therefore the steps a bank, NBFC, or a financial organization follows to recover the cash borrowed by the defaulter.
1. Privacy of Borrower
Lenders sometimes engage recovery agents to coerce borrowers to repay their loans. The borrower’s privacy is to be respected. These agents can contact the borrower at a place specified by him. If not specified, they can contact him either at his home or workplace.
2. Right to Balance Proceeds
When the security for a loan is auctioned by the lender to recover the dues, and if the sale proceeds are more than the total dues, a borrower is entitled to receive the balance amount. Even if a borrower’s asset is repossessed, it is imperative to monitor the auction process. The reason being lenders tend to refund any excess amount realized after recovering their dues from the auction. Therefore, the borrower must ensure that the money is refunded to the borrower in a timely manner.
3. Right to Fair Valuation of Assets
The value of the property is often much more than the total dues of the lender. However, the lender may only be interested in realising as much value so that the dues are recovered, which may not be in the best interest of the borrower. To ensure borrower’s right to fair valuation, RBI has set guidelines for valuation of collaterals. As per the SARFAESI Act, before selling the repossessed asset, the lender needs to get the valuation done from an approved valuer. In compliance with these guidelines, most banks have prescribed detailed criterion for empanelment of valuers and generally only these valuers are used. This ensures that the repossessed asset is not sold at any price – unilaterally determined by the bank.
4. Right to be heard
You have a right to raise an objection to the repossession notice sent by the bank during the notice period. The authorized officer has got to reply within 7 days, informing you whether your objections were accepted or denied, giving valid reasons.
5. Right to be treated politely
Banks are regulated entities. They cannot nor do they have the right to mistreat or harass you for defaulting. The bank has got to keep certain things in mind once they are communicating with you. A collection officer/bank agent has got to politely request to satisfy you at an area and time that’s convenient for you. The agent can meet you only from 7 AM to 7 PM. The collection agent is meant to treat you and your family with respect, without humiliating, harassing, or any usage of abusive language.
Lenders often seek the help of recovery agents to coerce borrowers to repay their loans. However, the agents cannot cross the road that banks have prescribed as a part of their code of commitment to customers. These third-parties can contact defaulters either at an area specified by the latter, residence or workplace. Moreover, they can make such visits only at specified times during the day. They cannot violate norms of decency and civil behaviour during their visits. In case the agents plan to intimidate or humiliate the borrowers or their relations, the latter can raise the matter with the lenders and eventually, the banking ombudsman offices.
6. Right to Adequate Notice
It is not a criminal offence to default on loan repayment. Loan default is generally a civil wrong, except in cases where there is fraudulent or dishonest intention on the part of the borrower at the time of availing the loan.
A right to adequate notice makes sure that you are informed about a possible future action by the lender well in advance so that you have time to act on it. Typically, banks and financial institutions give a 60-day notice under the SARFAESI Act before proceeding with securitisation action in respect of the secured asset.
Consequences of Non-Payment of Personal Loan in India
Loan default inevitably occurs if you stop making payments. Penalties, fines, and interest charges may accrue on your account as a result, increasing the cost to you. Your credit ratings may decline, and it may take years to rebuild them, so you may be able to borrow money again quickly after that. If things go very bad, you’ll need to pay attention to the paperwork and criteria to at least show up in court. These records might aid in defending your position in court. However, you are not required to give up full ownership rights to an asset or equitable treatment while facing debt default.
- If you skip even one EMI, the lender will contact you by phone, email, SMS, notification, or other means to remind you. The lender may grant you some further time over the due date if the payment is still outstanding and the grounds for the non-payment are valid.
- Even if the deadline was extended, you still face penalties if the EMI is not paid. Additionally, your credit score will suffer as a result.
- If the default persists and 3 consecutive EMIs are not paid, the personal loan will be considered a non-performing asset.
- The most severe penalty for personal loan default is a drop in credit score. Each lender will update the Transunion Cibil on the borrower’s repayment habits. Your Cibil score will drop by 50 to 70 points for each EMI you skip. Your credit score will be severely lowered if you consistently miss your EMI payments, which may lower your eligibility for future loans.
1. Liability Accumulation
The idea of an EMI was established to make loan repayment easier. Missing personal loan EMI payments will be counterproductive since they will cause debt to accrue. The cost of the loan will increase as a result of the penalty assessed for such delays and missing payments, making it even more difficult to pay off the debt.
2. Drop in Credit Score
A credit score of 750 is the bare minimum needed for quick acceptance of any loan or credit card. To realise greater aspirations, such as acquiring a home, your goal should be to keep your credit score over 750.
3. Legal Action
If you continue to skip personal loan EMI payments beyond 180 days, you may be subject to legal action. The lender will provide you with enough leeway in the form of an extension of the EMI due date, a loan moratorium, etc., but legal action will be used as the final form of recovery.
Precautions to avoid Loan Defaults
- Increase your loan period to make your EMIs affordable.
- Organise and restructure your loan and reset some of the terms and conditions.
- Take up temporary relief if you are facing a temporary financial problem. However, you can be charged a penalty, in this case.
- To lower the interest rates by converting your unsecured loan to secured.
- Sometimes Banks give you an option to settle the loan through a one-time settlement payment. But, choose this option as the last option because it can reflect negatively on your credit score.