What are the Legal Consequences of a Personal Loan Default in India?

Be it any kind of financial emergency, many people in this present era apply for a personal loan to meet their monetary needs. An unsecured loan is mostly preferred because you don’t have to deposit any valuables as security or guarantor to get a loan.

But unsecured loans are considered risky for the lender because when you default on your payment, the lender has no security to recover his money, pushing him into losses.

According to The New India Express, Reserve Bank of India (RBI) data shows that personal loans are considered risky business for banks, as there is no collateral – grew at 20.4 percent between February 17, 2017, and February 18, 2018.

Hence, borrowing loans is a serious financial obligation, considering such defaults. But some defaults can be unintentional due to certain personal emergencies or death or bankruptcy etc.

So to avoid further damage to your finance and reputation, it is always advisable to consider some of the below-mentioned warning signs and things you should do when you default on your loan:

  • Your lender issues a notification – When you miss out on your first or second payment, your lender issues a notification. Some lenders will send an agent to your residence or send a message to your registered contact number, asking you to make your payments.

If there is no response from your end, then a few lenders may issue a notice stating the cashing in of post-dated cheques.

  • Negotiate with your lender – Whenever a defaulting situation arises, make sure you approach your lender for a solution. If your reason for defaulting is genuine, which might have arisen due to unavoidable and unpredictable situations, your lender might understand your problem and ease your burden by halting your EMI payments or reducing the payment.

  • Submission of post-dated cheques – Do not ignore the notices regarding the post-dated cheques sent by your lender. Also, ensure that your account has enough balance for the cheque to pass through.

If your cheque bounces, then as per RBI guidelines, you will be charged as a criminal. (clearly stated under section 138 of the Negotiable Instruments Act of 1881).

Finally, the legal consequences you face when you default on a personal loan are:

  • You will face personal loan defaulter’s punishment; you will also be booked under the section of 420 as per the India Penal Code, which involves imprisonment.
  • Your name will be included in the loan defaulter’s list. Credit score will be severely affected and the chances of getting a loan in the future will be significantly reduced.

In order to avoid such consequences, it is always better to have an emergency fund that comes to your rescue. You can even negotiate with your lender about closing the loan completely in exchange for pre-payment. Also, make sure to borrow money from a lender who makes your repayments easy. This, in turn, helps in keeping your EMIs as low as possible, allowing you to make payments even during emergencies.