Consequences of Defaulting on a Personal Loan

Posted by Abhay Kumar on August 31st, 2022

When Surbhi faced a cash crunch, she applied for a quick personal loan online. Her application got approved quickly, and she got a personal loan instantly.

Like Surbhi, many people apply for personal loans. And why not? They have simple eligibility criteria, hassle-free documentation, and affordable interest rates.

But, getting any loan implies a financial obligation of repaying it. And the same applies to aninstant personal loan. Delaying loan repayments for a long time can lead you to default on your personal loan repayments.

Surbhi was stuck in the same situation after getting a personal loan instantly. She hadn’t been able to secure the funds to repay her loan amount and had defaulted on her loan EMI payments for over two months. That’s when she reached out to one of her banker friends Rahul for help. Rahul told her defaulting on loan repayments had severe consequences. Here’s everything Rahul told her about it.

Four Negative Consequences of Defaulting on a Personal Loan

1. Negative Impact on Credit Score

Rahul told Surbhi that although personal loans had instant approvals, lenders kept an eye on borrowers’ repayment behaviour and gave regular updates to credit bureaus. For every late EMI payment that she would make, her credit score would drop by 50 to 70 points.

He also stressed that continuous late repayments could result in causing irreversible damage to her credit score. This meant that building up the credit score would become more difficult.

2.Financial Burden

Rahul told Surbhi that defaulting on a personal loan could result in a higher debt burden. Confused, Surbhi asked Rahul how that was possible. That’s when Rahul informed her that lenders charged borrowers late payments and penalties when they defaulted on loan EMI payments. These charges were added to the outstanding loan amount, increasing the total debt burden.

3.Legal Action

Rahul also informed Surbhi that lenders took stricter action against long-term loan defaulters. In fact, if she defaulted on her personal loan for over 180 days, she would have to face legal action.

 The lender could file a case against her under section 138 of the Negotiable Instruments Act 1881. In addition to that, she would also have to bear legal fees. This would result in several dues apart from regular loan EMIs.

4.Difficulty in Getting New Personal Loans Instant Approval

Rahul reminded Surbhi that since defaulting on loan repayments would negatively affect her credit score, securing new loans would become difficult. This is because new lenders prefer offering loans to borrowers capable of making timely repayments.

Moreover, if a loan default was uncleared for over 180 days, lenders would notify the credit status as ‘Written-off’ to credit bureaus. When prospective lenders see this, they know the borrower has a history of defaulting on loan payments. Hence, Surbhi would face challenges when applying for new loans and getting online personal loan approvalstoo.

The Final Word

After listening to all this, Surbhi understood the importance of repaying her loan on time. She decided to arrange funds to repay her dues timely and start applying for personal loans online only after clearing her outstanding debts.