What Can Happen in Personal Loan Defaults?

Last Updated : Sept. 23, 2022, 3:43 p.m.

Lenders offer you a personal loan believing that you will pay back in Equated Monthly Installments (EMIs). The credit risk for lenders is enormous given that this loan is granted without any securities such as fixed deposits, life insurance, shares, mutual funds, etc. In case someone defaults, banks or non-banking finance companies (NBFCs) won’t have anything to fall back on and recover the money.

If you are new to credit, you should know that a ‘Default’ label is assigned when someone doesn’t pay the personal loan EMIs for 3 months and more and doesn’t respond to calls and intimations made to him/her in this regard. Given the high credit risk, lenders put things very negatively about such borrowers while sending their repayment report to credit bureaus such as CIBIL , Experian, etc. Consequently, they will face enormous hassles in their credit life, which can affect their social esteem too. Let’s talk about the ramifications of personal loan defaults here.

What are the Problems You Could Face with a Personal Loan Default?

A personal loan default comes with problems such as a poor credit score, difficulty in getting fresh loan approvals, having to deal with legal notices and constant knock on your door from bank representatives, etc. Let’s discuss these problems separately.

Poor Credit Score is the Obvious Result of Personal Loan Default

As told before, lenders send a very negative report of individuals doing personal loan defaults to credit bureaus. The concerned bureaus will read through the report and mark it as default in the credit report of such borrowers. It will lead to a poor credit score and render such individuals ineligible for fresh unsecured loans, if not secured loans.

Legal Notices & Constant Visit of Bank Representatives

When the personal loan dues remain unpaid for long, the lender writes them off and the same is reported to the credit bureau. But that does not prevent lenders to take legal action against borrowers committing a personal loan default. Lenders will send legal notices to such borrowers asking them to pay the loan dues. If they don’t act upon the same, bank representatives could visit their residence frequently and ask them to pay the dues. In case you fall among such borrowers, you may not find it good socially when someone knocks your door constantly for the payment of loan dues.

Difficulty in Accessing Unsecured Loans in the Future

With a personal loan default, you almost shut the door for any unsecured credit in the future. So, no more personal loans can be given to you. Lenders will also hesitate to offer you an unsecured business loan and a car loan because of the poor credit score owing to personal loan default. A default not only brings down the credit score far away from 750, considered a good one, but also puts you in a dark spot. It makes lenders feel that you can’t be trusted with credits as your previous loan payment record is poor.

Home Loans Can be Approved, But at a Much Higher Interest Rate

Home loans are secured loans granted against the mortgage of the house property. So, lenders can still approve the home loan application if the concerned individual is earning good and has been getting a salary on time. It will also check the bank statements to find how he/she has been managing the account. If all that turns out in favour of the concerned person, a home loan can be approved. But the personal loan default committed by the individual before will result in higher interest rates, which will further lead to massive interest payments over time. In case you do not have a personal loan default in your name and have a good credit score, the interest rate can be much lower. Most of the lenders have started setting home loan interest rates based on the credit score of the individual.

Solutions to Implement When Faced with Problems of Personal Loan Defaults

The story won’t complete if we just speak of the problems and not suggest the solutions. There are remedies for personal loan default problems. Have a look at them below.

Take the Debt Settlement Course

Although debt settlement is not advisable, you should do it fast in case you can’t pay the entire loan amount due to loss of income or irregular earnings. It is an exercise by which you agree to pay the reduced amount to the lender and get free of debt obligations. The lender might be giving you that option itself. In case the lender hasn’t, approach it personally for a debt settlement deal.

But the lender will approve the deal only when it is satisfied with your point of no or sub-optimal earnings. It will check your bank statement and ask your employer regarding your income. If it approves the deal, you will get some time to arrange the required sum and pay the same to the lender. The moment you pay that sum, the lender will mark it as ‘Debt Settled’ and report the same to the credit bureau. The bureau will mention the same thing in the individual’s credit report.

Shall You Look to Pay the Unpaid Personal Loan Dues Post Debt Settlement?

Having the debt settled status is better than an outright personal loan default. But you can get it much better over time by paying the remaining unpaid dues after doing the debt settlement. As things don’t remain the same, you might earn enough to pay the remaining amount after the debt settlement. In return, your credit score will inch up much higher and the debt settled status will give way to debt fully paid. A debt settlement won’t allow you to get unsecured loans, but when the status converts to debt fully paid, you will be eligible for almost all credits if you have the required income.