Punishment for Non-payment of Personal Loans in India: All you need to know

Want to find out about the punishment for non-payment of personal loans in India? Being practical, you may be aware that even the most disciplined person may face a financial crunch. This may lead to missing a few EMIs. What happens next?

Whether you want to take a loan now or later, you must know the full extent of the legal actions or penalties you may face if you fail to repay. Learn about its negative consequences, your right as a borrower and more below.

When You Don’t or Can’t Repay Your Loan

Financial companies will seek to collect the amount due to them in a methodical process as outlined by the RBI. 

• First, they will send you notifications and reminders through mail and SMS. 
• Next, they will offer you an extension on the repayment duration and the option for loan restructuring. 
• If you are still unable to repay a personal loan in its entirety, lenders are at liberty to take legal action.
• You must pay penalties and the lender may also seize your assets. 
• You may also need to submit a post-dated cheque for repayment.

All this can strain your finances and peace of mind, apart from having other outcomes. These are as follows: 

• You are credit score may go down 50–70 points with every default
• You can lose your asset pledged as collateral, if any
• Your co-signer or guarantor will have to pay on your behalf
• Your lender will charge additional late fees and default charges
• You will have to pay higher interest for your outstanding EMIs

Legal Action and Punishment for Non-payment of Loans

Initially, defaulting on a loan results in reminders and negotiation. When this does not lead to any positive outcome, lenders have to deal with the matter legally. If you miss 3 personal loan EMIs or after 90 days from the first unpaid EMI due date, the loan will get classified as a non-performing asset.

After 180 days or 6 unpaid EMIs, the civil court takes the case up under Section 138 of the Negotiable Instruments Act of 1881. After reviewing the case, the borrower’s reason for non-repayment and other factors, the court will announce the verdict that all the parties must accept. 

Rights of a Borrower

Here are the legal rights entitled to you by RBI during the loan recovery process: 

• Rights to Notice: You have the right to get a 60-day notice when the lender is putting up your asset for sale
• Rights to Fair Value: Lender must maintain transparency about the value of the asset
• Rights to be Heard: You can legally raise objections during the 60-day notice period to regain your possession by paying the due amount 
• Rights to Human Treatment: Lender must maintain the dignity of the borrower and not pressurise you for payment during the recovery process 
• Rights to Claim the Balance: If the asset sells for a higher value than the due amount, the residual funds legally belong to you as the borrower

While these rights are available for your protection, it is best to avoid facing legal action. Maintaining a good repayment history allows you to get better terms on your loan and repay comfortably and without missing EMIs. You can check your credit score for free on Fibe to ensure your score enables you to borrow affordably. 

A competitive rate of interest and proper repayment planning can help you pay your dues on time and also build a better score for the future. This will also help you boost your financial wellness today and tomorrow. 

FAQs on Non-Payment of a Personal Loan

Can I go to jail for not paying a personal loan in India?

Failure to repay your personal loan in India does not lead to direct imprisonment. Since defaulting on a loan is a civil offence, it does not lead to criminal charges.

What is a legal notice for non-payment of a personal loan?

Legal notice for non-payment of loan is a document the bank or NBFC sends to the borrower when they default. It contains the following: 

• Reminder of the loan agreement terms 
• Defaulted payment amount
• Deadline for payment

If you do not pay within the mentioned period, the lender can take the matter to court. 

How do I settle an unpaid personal loan?

Generally, loan settlement is the last option lenders give after considering your financial situation and other factors. You can pay the final amount to close the loan by choosing this option. This amount is lower than your outstanding balance and is subject to the lender’s discretion. 

How long does an unpaid loan last?

Old unpaid dues are only valid for seven years. After this period, the lender can’t act if they have not maintained contact. Further, after this period, the adverse effects of the default will not be visible on your credit report.