What happens when a borrower fails to repay a loan

A loan, extended by the lender (banks and other financial institutions) to the borrower, helps the latter meet his or her short-term financial obligations. The loan is given with an understanding that the borrower will pay back the principal amount and interest at the end of the loan tenor. This is primarily why a loan services both the borrower and the lender; the borrower gets a liquidity release, and the lender earns more on the principal amount.

Many financial institutions offer several loans for different purposes. Moreover, EMIs have made it more convenient for the borrowers to pay back the total loan amount over a certain period of time in easy instalments. However, the decision to take an online personal loan from a financial institution warrants the need to have a steady cash flow as that will evaluate your repaying capacity.

Additional Read: What Happens To Personal Loan if Borrower Dies

However, life is often unforgiving with the surprises it can throw at you. Bankruptcy, a major accident and other adversities can lead to an unanticipated cash crunch, throwing the borrower into a downward financial spiral. While chances are the lenders being unrelenting on the payment front with several measures at their disposal, it will help you know your rights in such a situation and the probable consequences of failing to repay a loan.

Your credit score nosedives

Every lender sends records of the borrower’s repayment patterns to CIBIL and other credit rating agencies in India. Thus, erring or defaulting on EMI payment brings down your score by a certain percentage. The decision to grant a loan depends on the borrower’s credit score; a score on the lower side is equivalent to a risky profile, somebody the lender wouldn’t be pleased to help.

Moreover, if you are a serial defaulter, chances are a lender would start considering you a classic NPA. The whole episode surely won’t go down well with the bank and even if the borrower gets past with a loan, the interest rate charged will be much more than the one imposed on a good credit profile with good repayment history.

Additional Read: What is Loan Account Number (LAN)

Reminders by banks become routine

Every lender usually allows a slip on one or a maximum of two repayments. But if the problem persists even after three consecutive months, the bank would send a notice to the borrower, urging him or her to pay up soon. A borrower is declared a Non-Performing Asset (NPA) after defaulting for 90 days straight, which potentially bars him from getting any loan in the future.

The lender might resort to legal action

Not adhering to the reminders sets off a chain of events that usually starts with the bank taking to a legal notice.

Additional Read: What is annual percentage rate (APR): Understanding how APR is calculated

The lender can impose a penalty

In case of multiple loans, a lender can also impose a penalty on the defaults and late payments. This usually applies to an unsecured loan where the lender doesn’t have any collateral as a guarantee against non-payment.

Collateral gets affected

While this is the last resort, banks can rightfully take possession of the collateral and auction it to recover the loan amount if you fail to repay the loan.

What rights do you have?

If you happen to find yourself in similar muck, know that redressal measures can be of help. You can talk to your lender about it, who can suggest ways of paying up the EMI on time. One trick is to reduce the EMI value by spreading it over a longer tenor.

You can also consider loan refinancing (debt consolidation) as another option. This allows you to apply for another loan to service all or a part of the previous loan. But bear in mind that the interest payouts and the EMIs should be lower than the original loan.

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