Personal Loan Default: Financial Penalties And Legal Risks You Should Know
Defaulting on personal loans can lead to a damaged credit score, late fees, higher interest, and collections. Legal consequences include lawsuits, wage garnishments, asset seizures, and loan recalls.
Individuals who miss the interest repayments on personal loans can face several financial and legal consequences. A personal loan helps individuals cover personal expenses whenever they face a credit deficit.
Due to the typically collateral-free nature of personal loans, lenders bear a higher risk.
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Let’s understand the consequences of defaulting on a personal loan:
Financial Consequences
Damage to Credit Score: Missing a payment can significantly lower your credit score, making it more difficult to obtain future loans. Lenders will request credit bureaus to lower your credit score if you default your personal loans. Once your credit score gets lower, it becomes difficult to improve it.
Late Fees and Penalties: Lenders impose hefty late fees, which increase your outstanding balance.
Higher Interest and Collections: Unpaid loans may accrue additional interest, and lenders may transfer your case to a collection agency.
Legal Consequences:
Legal Action: Lenders can sue for repayment, potentially leading to wage garnishments or asset seizures.
Loan Recall: Some lenders may demand immediate repayment of the full amount. It can take legal recourse if you fail to comply the issue.
Loss of Collateral: If it’s a secured loan, the lender can seize the pledged asset, such as a car or property.
Can a Borrower File for Bankruptcy if they can’t Repay their Personal Loan in India?
Yes, a borrower can file for bankruptcy if they are unable to repay their personal loan in India. However, the process of filing for bankruptcy in India is lengthy and complex. The borrower must file a petition for bankruptcy with the National Company Law Tribunal (NCLT), which will appoint an insolvency professional to oversee the bankruptcy proceedings.
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