what are the consequences or punishment for non payment personal loans

What Happens If You Miss One EMI?

If you fail to pay a single EMI, most lenders will contact you through SMS, phone calls, or email to remind you of the missed payment. If the delay is due to a genuine reason like a medical emergency or temporary job loss, lenders may give you a grace period or extend the due date.

However, even with such flexibility, missing an EMI still incurs late fees and penal interest. These charges are typically around 2% to 5% of the missed EMI amount and vary from lender to lender.

Consequences of Consecutive EMI Defaults

If you miss more than one EMI, the problem becomes serious. Here's what can happen:

1. Loan Becomes Non-Performing Asset (NPA)As per RBI guidelines, if a borrower fails to repay EMIs for more than 90 days, the loan is classified as a Non-Performing Asset (NPA). This status reflects very poorly on your credit history.
2. Credit Score ImpactYour lender reports EMI repayment history to credit bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. For each missed EMI, your CIBIL score may drop by 50 to 70 points.
3. Legal Notices and Recovery ActionsIf the default continues beyond 90–180 days, lenders may escalate the matter.

Legal Action for Non-Payment of Personal Loans

While personal loans are unsecured, lenders have legal recourse if the borrower refuses or fails to pay.

Section 138 – Cheque Bounce Law

If a cheque issued towards EMI repayment bounces due to insufficient funds, the lender may prosecute the borrower under Section 138 of the NI Act. The punishment can include:

1. Monetary fines up to twice the cheque amount
2. Imprisonment for up to 2 years
3. Civil lawsuits for recovery

Civil Suit for Recovery

Lenders may also file a civil case under the Civil Procedure Code (CPC) for recovery of dues. The court may direct salary garnishment or attach movable and immovable assets.

Borrower Rights in Case of Loan Default

Despite the legal provisions available to lenders, borrowers are also protected under Indian laws. These are the rights every borrower must know:

1. Right to NoticeYou must receive written communication before any recovery action. No lender can seize your assets or threaten you without serving proper legal notice.
2. Right to Fair ValueIf the lender sells your pledged asset (in secured loans), you are entitled to receive the balance amount after adjusting the dues.
3. Right to be HeardYou can provide written explanations for the default and request extensions, restructuring, or moratoriums.
4. Right to Respectful TreatmentRBI guidelines mandate that recovery agents treat borrowers respectfully. Harassment, verbal abuse, or threats are illegal and punishable.
5. Right to Settle or RestructureYou can negotiate with your lender to restructure the loan or settle the dues through a one-time settlement (OTS) plan.

Additional Consequences of EMI Non-Payment

Beyond legal and credit issues, missing EMI payments can cause a ripple effect on your personal finances.

1. Accumulated LiabilitiesIf you skip EMIs, unpaid interest keeps compounding. This increases the total cost of the loan significantly, making it even harder to repay.
2. Difficulty in Achieving Financial GoalsA poor credit score can make your dream of owning a home, car, or starting a business difficult, as lenders see you as a high-risk borrower.
3. Mental Stress and Family PressureDebt collection calls and legal threats can cause mental and emotional strain, affecting your personal and family life.

How to Avoid Personal Loan Default?

To stay financially healthy and avoid the severe consequences of personal loan EMI defaults, follow these steps:

1. Budget for EMIsEnsure that you include your loan EMI in your monthly budget. Allocate your salary accordingly so that EMIs are always paid first.
2. Set Up Auto DebitUse the auto-debit feature with your bank account to automate EMI payments. This reduces the risk of forgetting due dates.
3. Keep Emergency FundMaintain an emergency fund worth at least 3–6 months of your EMIs to safeguard against job loss or unexpected expenses.
4. Choose EMI WiselyWhen applying for a personal loan, select a repayment tenure and EMI amount that is comfortable and suits your income pattern.
5. Inform Lender ProactivelyIf you anticipate financial difficulty in repaying your EMIs, proactively inform the lender. Most lenders will work with you to find a solution—like a loan moratorium, EMI holiday, or tenure extension.

Loan Restructuring Options

In case of genuine financial hardship, you may request the lender for the following restructuring options:

1. EMI Postponement or Moratorium
2. Loan Tenure Extension
3. EMI Reduction Plans
4. Interest-Only Payments for a Few Months
5. One-Time Settlement (OTS)

Approach the lender early and with proper documentation (salary slips, job loss proof, medical records, etc.) to avail of these options.

Taking a personal loan comes with the responsibility of disciplined repayment. While personal loans offer quick access to funds without collateral, failing to repay them on time can lead to serious consequences—penalties, legal action, credit score damage, and mental stress.

At FinCrif, we urge borrowers to plan their loans carefully and seek guidance if they encounter repayment difficulties. Be proactive, know your rights, and always stay financially informed.

Stay financially smart. Pay EMIs on time. Protect your credit health with FinCrif.