Shreya took out a Personal Loan from her bank in order to start her own couture business. The business was doing great for the first couple of months, but then started to slow down. Lack of regular customers led to little revenue generation. This in turn made it extremely difficult for her to keep paying her Personal Loan EMIs, and eventually she defaulted on her loan.

Though defaulting or not paying a couple of EMIs is never recommended, but sometimes due to reasons beyond your control, you might not be able to pay them.

What happens then?

While some banks and other money lending institutions offer flexible policy plans, most don’t and take action.
Since Personal Loans don’t require you to put up any collateral against them, defaulting on it will most probably lead to the following things happening:

Increased interest rate

On defaulting on your EMIs, the bank generally increases the rate of interest on the loan and/or levies additional fees and charges on your loan.

Lower CIBIL score

All banks and NBFCs report failed payments and credit card payment defaults to credit bureaus such as the CIBIL and Equifax. Hence, yourCIBIL scorewill be impacted negatively. Do not take this lightly and neglect it, because it takes a lot of effort to rebuild your credit score.

Collection agencies

Banks and other NBFCs sometimes turn to collection agencies to get back their money. These agencies could call you, write you letters or make a house visit.

Your co-signer or guarantor suffers

It’s not just you who faces the brunt of defaulting as your co-signer and/or guarantor’s credit scores also take a hit. Additionally, they too receive calls and visits by loan recovery agents in order to recover the loan amount.

Legal action by banks and NBFCs

There have been cases in which lenders have opted for various legal routes with a view to recover money from personal loan defaulters.

Rectifying the debt

If you do end up defaulting on a loan, don’t worry. You can bring yourself out of that situation by taking the following steps:

Don’t panic

We understand defaulting on a loan can become stressful. That’s why, begin with calmly figuring out your expenditure and understanding what led to this situation.

Communicate with the lender

Talking with the bank can sometimes work wonders. Explain to them why/ and under what circumstances you defaulted and try to work out a solution that helps the both of you.

Consider refinancing

Refinancing gives you the ability to reduce your monthly EMI amount. However, most banks only consider individuals with good credit scores for refinancing.

Source additional income or cut back

Find ways to make additional income by taking up a short-term job. If that isn’t a feasible option, try budgeting your monthly expenses to save more and pay off the additional debt.

Learn more about your Personal Loan Eligibility here


The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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