What is the Cost of Defaulting on a Personal Loan?

Personal loans are a widely-adopted way to receive funds when in an emergency. In India, people usually take personal loans to pay for medical emergencies, marriages, education, house renovation, etc. However, when you take a loan, you also have to pay it back with the pre-decided interest which is paid in the form equated monthly instalments. When you fail to fulfil this obligation for more than a considerable amount of time, you are set to be referred to as a loan defaulter.

Read ahead to know the common causes of personal loan defaults in India, what consequences they bring and what ways can be adopted to avoid loan defaults.

Key Factors Behind Increasing Personal Loan Defaults

While there can be individual reasons of defaulting a loan, which is mainly due to lack of funds, the following are the causes of personal loan defaults when we look at the bigger picture:

Lack of Financial Education: When the borrowers lack enough knowledge and understanding of the finances, they end up making serious financial mistakes. Most of the first-time borrowers of small ticket loans are unaware of the proper ways to manage the borrowed money. Their financial challenges along with lack of guidance result in them ending up with loan defaulting.

Speedy Loan Disbursals Without Proper Checks: With the rise in online facilities, loan disbursals have sped up and their numbers are mounting up. There is negligence on the checking part where the authorities are supposed to thoroughly check the borrower’s creditworthiness before approving a loan.

Poor Collection Mechanisms: When it comes to small-ticket loans, the repayment collection is lacking due to inadequate technology and infrastructure, especially in rural areas. The recovery of overdue loans is not efficient enough. This further adds to the defaults piling up, even reaching a point where it becomes hard to make any recovery.

Rising NBFC Dominance: Non-Banking Financial Companies have a stronger hold on loans under Rs.10,000. This is fulfilling the needs of borrowers from the tier III cities. Unfortunately, these are weak borrowers with poor credit history, who fail to repay the loan.

Economic Reasons: Factors such as rising inflation, reducing growth, dormant wages and other declining macroeconomic conditions are further burdening borrowers with financial pressures from all sides.

You may also like "Borrow Better with Top Personal Loan Alternatives"

Consequences of Personal Loan Defaulting

Defaulting a personal loan can result in financial, legal as well as psychological impact.

A Plethora of Charges: Defaulting or delaying personal loan EMIS can lead to so many additional penalties and increased interests, that you will go deeper in debt. This will not only increase your already poor financial scenario, but may even land you in legal trouble, affecting your psychologically too.

Poor Credit Score: When the defaults are reported to the Credit Information Companies, the same gets reflected in your credit reports. This lowers your creditworthiness, impacting your ability to borrow funds for a long time. A sharp fall in credit score takes much time in improving.

Impact on Lifestyle and Reputation: Loan defaults can bring recovery agents to your home/office and too many calls from them. While this may cause a lot of embarrassment, it may even hamper your mental health and living standards.

Legal Consequences: When a borrower does not pay the EMI in time and brings the loan to a defaulted stage, s/he is being repeatedly reminded of the pending payments. The bank may finally send you a legal notice in such a case, which will also impact the co-applicant or guarantor, if any. Again, not responding to the same can end up with a recovery case filed in the court.

There are several other possible results of payment defaults on loans, like difficulty getting new credits in the future, a bad name as a default borrower, impact on the family, etc.

Don't miss this! "How Many Personal Loans Can I Have at a Time?"

Avoiding Loan Defaults

The following steps can be taken care of right from the very beginning, so you do not end up as a defaulter:

• Make and manage an emergency fund right away after borrowing. You will have some funds to handle an unexpected financial emergency this way.
• Communicate your inability to repay with the bank, which may then offer moratorium as a temporary relief.
• You may ask them to restructure the loan so as to increase the length of the loan tenure for reduced EMIs.

The key is to be prepared before anything unimagined happens.

Recent article "How to Apply for a Personal Loan Without PAN Card?"

More Latest Articles

Upcoming Bank Holidays

Find More Useful Links