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What Happens If an Unsecured Loan is Not Paid? Exploring Consequences in India

In today’s fast-paced world, where dreams are chased with a sense of urgency, it’s no surprise that many individuals turn to loans to fulfil their diverse needs and aspirations. While secured loans offer a safety net through collateral, unsecured loans provide a seemingly effortless path to financial assistance, requiring no assets as collateral. But what happens when the music stops, and you’re left with an unpaid unsecured loan haunting your financial landscape? Today, we will explore the domino effect of defaulting on an unsecured loan in India and uncover the consequences that lurk in the shadows.

What are the consequences of not repaying a personal loan in India?

When an unsecured loan is not paid, the consequences can be significant, impacting both the borrower and the lender.

When you find yourself unable to honour your loan obligations, the lender holds the power to unleash a legal storm upon you. Brace yourself for a potential whirlwind of consequences, including court-issued orders demanding full repayment or the imposition of penalties like a wage garnishment or asset seizure. As if that weren’t enough, the lender can tarnish your creditworthiness by reporting your debt to credit bureaus, effectively slashing your credit score and blocking the gateway to future loans.

But that’s not all. Late payment fees and interest rate hikes may pile on, exacerbating your financial woes. The lender, unwilling to wait idly, may unleash the hounds in the form of debt collectors if your payments remain overdue. The mere thought of relentless calls, persistent reminders, and the looming threat of reputation damage can inflict unbearable stress upon your already burdened shoulders. It’s a constant battle to salvage your financial standing while dodging the blows of both financial and emotional strain.

Let’s explore the potential outcomes:

  1. Impact on Credit Score:  Failure to repay an unsecured loan in India can have a detrimental effect on your credit score. Lenders report loan repayment information to credit bureaus and missed or late payments can lower your credit score. A lower credit score makes it difficult to obtain credit in the future, such as credit cards, mortgages, or other loans. Even if credit is approved, higher interest rates and less favourable terms may be imposed due to the increased risk associated with your credit history.
  2. Legal Actions and Recovery Measures: If you don’t pay back an unsecured loan in India, the lender may take legal action to recover the outstanding debt. This can involve filing a lawsuit against you, seeking a court order to reclaim the loan amount. If the court rules in favour of the lender, you may be required to repay the loan, along with any accrued interest, fees, and legal costs. In some cases, the court may issue a judgment, allowing the lender to initiate recovery measures such as wage garnishment or seizing assets to satisfy the debt.
  3. Collection Attempts and Harassment: To recover the unpaid loan amount, lenders or collection agencies may engage in collection attempts. They may contact you through phone calls, letters, or other means to remind and urge you to settle the outstanding balance. However, it is important to note that lenders and collection agencies must abide by the guidelines set by the Reserve Bank of India (RBI) and refrain from employing aggressive or harassing tactics during the debt collection process.
  4. Damage to Relationships and Co-borrowers: Unsecured loans often involve co-borrowers, individuals who share the responsibility of loan repayment. If you default on an unsecured loan in India, the burden of repayment falls on the co-borrower(s). This not only affects your relationship with the co-borrower(s) but can also harm your credit score if the debt remains unpaid. It is crucial to consider the potential damage to personal relationships and financial trust before involving someone as a co-borrower.
  5. Difficulty in Obtaining Future Loans: Defaulting on an unsecured loan can make it challenging to secure loans in the future. Lenders assess creditworthiness and repayment history when considering loan applications. If you have a history of defaulting on loans, lenders may perceive you as a higher-risk borrower, leading to loan rejections or offers with less favourable terms and higher interest rates.

How has the non-payment of personal loans changed over the years in India?

The Indian government has taken action in recent years to lessen the burden of non-payment loans.  

For instance, the 2016 passage of the Insolvency and Bankruptcy Code made it simpler for lenders to initiate legal action against borrowers who defaulted on their debts. Additionally, it gave debtors more defence against legal action.

Additionally, by tightening laws on lending practices, the Reserve Bank of India has made it more challenging for people to take out personal loans that they cannot afford.

Conclusion

Defaulting on an unsecured loan in India can have severe consequences, including a negative impact on your credit score, legal actions by the lender, collection attempts, and strained relationships with co-borrowers. It is essential to fulfil your repayment obligations to maintain a healthy financial profile. If you encounter financial difficulties, proactive communication with the lender can often lead to alternative repayment options or debt restructuring plans. Responsible borrowing and timely repayment are key to avoiding the potential consequences of unpaid unsecured loans in India.

Amit Arora Finnable

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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