Taking a personal loan can be a smart financial decision when you need urgent funds for things like medical emergencies, home renovation, or education. But what happens if you suddenly find yourself unable to repay it?

Defaulting on a personal loan isn’t just about missed EMIs; it can seriously impact your credit score, lead to legal consequences, and make future borrowing much harder. In this blog, we’ll explain exactly what loan default means, what happens when you can’t pay your personal loan, and how you can handle or avoid this situation.

Whether you’ve already missed a payment or are worried you might, this guide will help you understand the risks and the right steps to take, with insights relevant to borrowers in India. Plus, we’ll explore how responsible lending practices, like those followed by DMI Finance, can support you during financial stress.

What is a Personal Loan Default?

A personal loan default refers to when you fail to repay your personal loan EMI within the agreed-upon duration. In most cases, if you fail to pay an Equated Monthly Instalment (EMI), the lender will remind you through calls, emails, or messages. When you miss two or three consecutive payments, banks or Non-Banking Financial Companies (NBFCs) will mark your personal loan as “default.”

Reserve Bank of India (RBI) mandates lenders (Banks and NBFCs) to classify a personal loan as defaulted when a borrower misses payments for over 90 consecutive days. When a loan account is classified as default, it affects the borrowers in a number of ways.

What Happens if You Default on a Personal Loan?

Here are the loan default consequences you will face:

1. Your Credit Score Drops

• Your credit score shows your creditworthiness. It not only qualified you for the personal loan but might have also helped get favourable terms.
• When you default, your CIBIL score drops. One missed payment may reduce it by a couple of points. But if you default completely, your score can go down drastically.
• The missed EMIs or default stays on your credit history for 7 years. This affects your ability to get a personal loan or any other loan in the future.

2. You’ll Have to Pay Late Fees

• When you delay paying your EMI, the lender charges you a late payment fee, a penalty, and additional interest.
• This increases the cost of borrowing, as it adds up to a significant sum to the total amount owed.

3. Lenders Initiate Recovery Procedures

• The lender will classify your loan account as default if you continue to miss payments for over 90 days.
• The lender will initiate formal recovery procedures like reaching out more frequently for EMI payment, sending you notices, or visiting your home or workplace.
• RBI’s guidelines on recovery agents, however, protect borrowers against aggressive recovery tactics such as threats, intimidation or public humiliation.

4. Lender can Initiate Legal Action

• If you continue to miss payments and respond to the lender, they can initiate a legal proceeding.
• In some cases, the lender can go to a court of law under the Negotiable Instruments Act (if post-dated cheques bounce) or the Civil Procedure Code to recover dues.

5. It Gets Difficult to Get Loans in Future

• A personal loan default stays on your credit reports and is visible to other financial institutions and banks.
• This will make your profile seem risky to lenders, preventing them from approving any loans in the future.

Will I Go to Jail If I Default on a Personal Loan?

Under the judiciary, personal loan defaults are considered and treated as civil matters. You can go to jail only when you commit fraud or contempt the court. Here are the legal implications of defaulting on personal loans:

1. Formal Recovery Process: Lenders initially issue reminders and formal notices to repay. In case of default of payment of dues, they can file a civil recovery in a civil court to recover the amount.
2. Cheque Bounce: In the event of the bouncing of post-dated cheques, lenders can take criminal action under Section 138 of the Negotiable Instruments Act. This is in the case of the cheque dishonour, and not the loan default.
3. Recovery and Legal Enforcement: Long-term defaults can result in marking the account as a Non-Performing Asset (NPA), and recovery can then be achieved by RBI-compliant recovery agents.

How to Avoid Defaulting on a Personal Loan

Here are the solutions and tips you can follow to avoid defaulting on personal loans:

• Inform Your Lender Early: Contact your lender and inform them that you won’t be able to pay the EMIs. Conveying your financial difficulties can help you find a mutually agreeable solution, such as a temporary payment holiday.
• Request a Grace Period: Request your lender to grant you a grace period to repay the personal loan if you’ve been regular up to now. A short grace period can prevent you from defaulting on your personal loan.
• Accept a Settlement (only if necessary): If you absolutely cannot pay the entire amount, you can ask for a loan settlement. You loan settlement as your last resort, as it affects your credit score.
• Debt Consolidation: If you have several loan EMIs or credit cards, you must consolidate them into one personal loan with manageable EMIs. This makes it easier to manage debt.

Defaulting on a personal loan has many consequences and negative implications. It can lead to recovery proceedings and damage your credit score. However, you can avoid defaulting with simple tips like communication with your lender, requesting a grace period and debt consolidation.

Another way to avoid defaulting is by applying for a low-interest personal loan. At DMI Finance, we offer an easy and convenient personal loan for all your financial needs. While an attractive interest starting at just 14.25% p.a. helps you save on interest, a flexible repayment tenure of up to 48 months helps with repayment. Apply for a personal loan with DMI Finance!

Frequently Asked Questions (FAQs)

1. Can a personal loan default lead to jail time?

No, defaulting on a personal loan is not a criminal offence, but lenders can take civil legal action to recover the money.

2. Will a single missed EMI affect my credit score?

Yes, even one delayed or missed EMI can lower your credit score, and repeated delays can cause a major drop.

3. How long does a loan default stay on my credit report?

A loan default usually stays on your credit report for up to 7 years from the date of default.

4. What is a personal loan settlement?

A personal loan settlement is when you pay a part of the outstanding amount as a lump sum, and the lender writes off the remaining dues.

5. Will lenders inform my employer about my loan default?

No, lenders cannot inform your employer about your personal loan default. RBI guidelines prohibit aggressive recovery actions such as public humiliation, threats, or intimidation.

6. Can I apply for another personal loan if I’ve already defaulted?

You can, but approval will be difficult, and the interest rate will likely be much higher due to your poor credit history.

7. Can my family be held responsible for my unpaid personal loan?

No, your family members aren’t legally responsible unless they were co-borrowers or guarantors for your loan.

8. Can I remove a default from my credit report?

A personal loan default can stay on your credit history for 7 years. You cannot remove a personal default before its due date, but you can improve your credit score.

9. What should I do if I keep getting calls from recovery agents?

Always communicate politely and note details of the calls, and if calls become abusive, report them to the lender and the banking ombudsman. If the bank doesn’t resolve your complaint, you can file a complaint with the RBI-appointed ombudsman.

10. Can I rebuild my credit score after a loan default?

Yes, by clearing dues, paying all future EMIs on time, and maintaining a good repayment record, your score can improve over time.

Personal Loan for Different Salaries/Incomes
Personal Loan for ₹25,000 Income	Personal Loan for ₹30,000 Income	Personal Loan for ₹40,000 Income	Personal Loan for ₹50,000 Income
Personal Loan for ₹60,000 Income	Personal Loan for ₹70,000 Income	Personal Loan for ₹80,000 Income	Personal Loan for ₹90,000 Income

Personal Loan of Different Amounts
₹50,000 Personal Loan	₹1 lakh Personal Loan	₹2 lakh Personal Loan
₹3 lakh Personal Loan	₹4 lakh Personal Loan	₹5 lakh Personal Loan

Personal Loan in Different States
Personal Loans in Delhi	Personal Loans in Haryana	Personal Loans in Uttar Pradesh
Personal Loans in Himachal Pradesh	Personal Loans in Rajasthan	Personal Loans in Uttarakhand