Personal loans are easily available in India and are provided by many banks and NBFCs at minimal interest rates.
Personal loans do not require any collateral that the lending institutions could seize in case a loan is not paid. These loans are also called unsecured loans.
While not paying loans is a scary topic for people, one must know that there are several compromises that banks offer for genuine cases where people are unable to pay a loan.
If you cooperate with the bank, you will be able to come to a negotiation that will help you clear the loan or settle it once and for all.
Police arrests cannot be made in case of non-repayment, but the bank can still take you to court to recover some of the money that you have borrowed. It is essential to know your options as well as the consequences of not paying personal loans.
What is a personal loan?
Any person can take a personal loan by providing minimal documents. This type of loan is prevalent because, unlike most loans, this one does not require you to fix collateral or third-party security if the loan amount is not met.
You do not have to provide documentation on why and how you want to spend your loan money. The lending institution will agree to sanction a loan and charge you with a specific interest rate that also has to be paid along with the loan money.
Now there are two types of interest systems.
- In one type, the interest is charged on the entire amount every time for the total duration of the loan tenure.
- The second type is where the interest rate is applied to the outstanding balance. The interest rates vary according to the lending institutions and the credit scores of the borrower.
Personal loans are taken against a fixed tenure within which the borrower has to repay the entire amount along with interest. The repayment need not be made as a lump sum.
Instead, the borrower can make the payments in instalments along with the interest rates. However, a pay gap of more than 60 days or failure of paying the entire loan amount will negatively affect borrowers’ credit score and may have serious implications for them.
What will happen if I fail to pay my loan?
It may be possible that due to various reasons, a person may be unable to repay a loan either partially or wholly. The cause of failure in repayment may be reasons like:
- Losing one’s job
- Unexpected expenses
- High interest
- Short loan tenure
- Other emergency reasons
In case you fail to make a loan payment, the bank or NBFC who sanctioned the loan and provided you with the amount will be able to take certain steps to make sure the loan is paid.
Since personal loans are not secured loans, the bank will first give you some time to repay the loan. If you miss the repayment date by a few days, it won’t have many consequences.
If you fail to make a payment within 60 days, your credit score will be affected negatively. You will also be made to pay a penalty amount along with the loan amount and interest.
If you delay loan payments for over 180 days, the lending institution will be forced to take action against you. However, you as a borrower will have certain rights that the law has granted. The bank will not heckle you or cause a fuss in your house for payments.
Banks are required to send defaulters a notice that will warn them about not making the loan payments. This notice is generally sent 30 days after missing the repayment date. In case the defaults fail to respond to the alert and continue not to pay the amount, the bank or NBFC will be filing under section 138 of the Negotiable Instruments Act, 188.
The Reserve Bank of India (RBI) will then give the defaulter a 15 days notice informing them about the legal proceedings that will take place against them and giving them a chance to reach a Grievance Redressal Committee. This committee will evaluate the financial situation of the borrower to see if their case is genuine.
Suppose the committee finds that the borrower is not paying money out of malicious intent. In that case, the person can face the consequences like not getting loans for the next five years and not being allowed to participate in the capital market.
In case the Grievance Redressal Committee finds that the defaulter has a genuine reason for delaying payments, then the bank may be asked to conduct negotiations with the defaulter to explore their options.
Some personal loans like the Mudra loan are taken by the borrowers, and the maximum collateral is covered by the government. In such cases, the borrower remains responsible for paying 20-25% of the loan, depending on the terms and conditions. Their credit scores will also get affected if they don’t complete the payments.
Can I be arrested if I don’t pay a loan?
A personal loan has to be repaid by the borrower within the tenure set by the bank. If the borrower fails to do that, the bank may take legal action against the borrower.
While the bank may not be able to charge you under a criminal offence, they may have a civil case against you.
Banks do not have permission to get you arrested due to the failure of loan repayment. The arrest may be possible if the borrower has used the loan amount to invest in illegal activities.
Most of the time, if the borrower replies to RBI summons or contacts the bank of their own accord, a case is not taken up.
If the Grievance Committee rules that your grounds of repayment failure are genuine, then the bank will have no right to ask for arrests. This is why it is better to negotiate with the bank instead of running away or remaining absconding.
Will the bank send recovery agents if I don’t pay my loan?
Banks do have the power to send recovery agents through third party organisations to bring absconding defaulters to the negotiation table. However, there are certain guidelines for banks to appoint a recovery agent and send an agent to a borrower.
RBI requires a bank to send multiple warnings to the defaulters, informing them about the chances for negotiations.
If the borrower fails to respond to these warnings, the bank will issue a letter to the defaulter informing them that a certified recovery agent may be sent to their house.
Despite repeated summons and warnings, if the defaulter doesn’t show up for negotiations, then a certified recovery agent may be sent to the house of the defaulter.
These agents, however, should behave a certain way and not threaten to cause havoc at the defaulter’s house.
If the bank fails to follow these steps or the recovery agent misbehaves with you and your family, you have the right to file a police complaint against the agent and the bank.
It is always advisable to avoid these situations by joining negotiations with the bank when you realise you won’t be able to make the payments.
What should I do if I cannot pay back a loan?
If you don’t want to deal with a civil court case and don’t want recovery agents at your house, you should immediately communicate with your lending institution to decide on a loan recovery process. Here are some of the options or compromises that the bank can offer you:
Extending the tenure of the loan while decreasing interest rates
A bank or NBFC may extend the tenure of your loan by a certain period for you to have more time in paying back the loan amount. The interest rates may also be lowered for your benefit. However, both these compromises come with limitations.
If you opt for a tenure extension, you might have to pay more money in interest at the end of the term. If you agree to convert your loan into a secured loan by supplying personal collateral, then you might get more rebates on the interest rates.
EMI or interest-free months
In some cases, like loss of job or income stoppage due to other reasons, the bank may consider waiving off the interest for a few months. This means you won’t have to pay the interest amount for those months and only have to pay the loan amount.
A maximum of 6 interest-free months is granted by the lending institution, after which the interest will be applicable again.
Paying a part of the loan
If the borrower is in such a condition that loan payments now and in the future are almost impossible, then the borrower may offer the bank a smaller repayment as a compromise.
The banks may accept a smaller repayment in return for closing the loan completely.
The bank may agree to this compromise to recover at least some amount from the borrower. However, convincing the bank will be rather difficult.
Taking out an extra loan or debt consolidation
A borrower, if willing, may take up another loan to pay out either entirely or partially the previous loan that has been defaulted.
However, the new loan must be taken after careful consideration so that the total loan amount does not exceed the interest on the previous loan.
Will I be able to take another loan even after I fail to repay the last one?
People will still be able to take out new loans after defaulting on one personal loan. Sometimes an extra loan may be taken to help repay the last defaulted loan.
Even with negotiations and settlements with the bank, the borrower will face heavy penalties in their credit scores. This will make it quite difficult for them to secure new loans.
Generally, a person with a bad credit score will be given a new loan after a lot of consideration, and the interest rates will be slightly higher than others. Some banks and NBFCs offer low-interest loans to even people with low credit scores.
Here are some of the leading banks and NBFCs that offer personal loans at minimal interest rates.
- HDFC Bank
- State Bank of India
- ICICI Bank
- Money View
- HDB Financial Services
- Bajaj Finserv
- Aditya Birla Capital
The NBFC Money View offers some very affordable interest personal loans to even people with a bad credit score. They require that the person should have a CIBIL score of 600 or more. This is way less than what many other banks and NBFCs offer.
Personal loans may not have a collateral requirement, but defaulting payments on one will have some severe consequences for borrowers. If you have the means to pay the loan amount but refuse to do so, you will be tried at court and may even face a jail sentence if found guilty of fraudulent activities.
The best option for you in case of severe or genuine repayment issues will be to take an additional loan with low interest to make a settlement on your defaulted loan.