Nowadays, personal loans are increasingly popular due to their convenience and many advantages. They are much easier to access than ever before, with a variety of lenders offering attractive rates and terms. They can be used for a variety of purposes, from consolidating debt to making home improvements
But, like any other loan, it comes with a responsibility to repay the borrowed amount within the specified time frame. Defaulting on a personal loan in India can have far-reaching consequences that can adversely affect your credit score and financial standing.
What happens if you default on a loan?
Implications of a loan default can range from a negative impact on the borrower’s credit score to potential legal action from the lender. Let us discuss them one by one.
Negative impact on credit score
The credit score is an indicator of an individual’s creditworthiness and is used by banks and other financial institutions to determine a borrower’s eligibility for a loan. When the borrower defaults on a loan, the lender reports the default to the credit bureau. This will have a negative impact on the borrower’s credit score and can make it difficult to get a loan in the future.
Loss of collateral
Another consequence of defaulting on a personal loan is the potential loss of collateral. When an individual takes out a loan, they may use an asset such as a car or house as collateral. If the borrower defaults on the loan, the lender may take possession of the asset in order to recover the money owed.
Increased interest rates
Defaulting on a loan can have serious consequences, one of which is an increased interest rate. When this happens, the lender may raise the rate in an effort to make up for the lost payments. This can make repayment more difficult and can have a significant impact on a borrower's financial situation. Interest rate hikes can be avoided, however, if the borrower takes the necessary steps to ensure they meet their loan obligations.
Penalty fees
Failing to make payments on time or defaulting on a loan can have significant consequences. Not only does it affect the borrower’s credit score and make it difficult to access loans in the future, but lenders may also charge penalty fees. These penalty fees can be costly and can accumulate quickly, making it even more difficult for the borrower to repay the loan. It is therefore important to make sure that all payments are made on time to avoid the risk of penalty fees.
Legal action
As the last resort, if a borrower defaults on a loan, the lender has the right to take legal action against the borrower. The lender may file a civil suit against the borrower in the court of law and can even get an arrest warrant issued against the borrower. It is important to note that the lender has the right to take legal action against the borrower even if the borrower has paid some of the amount due.
How to avoid defaulting on a loan?
Defaulting on a loan can have dire consequences for the borrower, so it is important to take the necessary steps to avoid it. The first step is to make sure that the loan amount is affordable and that the monthly payments are reasonable. It is also essential to read the terms of the loan carefully to ensure that all the conditions are understood.
You can start by creating a budget that outlines your income and expenses, and you must keep track on your spending to make sure you are staying within your budget. This way you can ensure that you always have enough money to make your loan payments.
Additionally, consider setting up automatic payments so that you don't forget to make your loan payments each month. If the borrower is having difficulty making the payments, it is best to contact the lender and explain the situation. Lenders may be willing to work with the borrower and provide assistance as needed.
