When an unfortunate situation arises in an individual’s life, managing even the most mundane operations involving expenses, especially debts, becomes even more challenging. There are many forms of borrowing, but the easy accessibility and flexibility of all types seem to shine through personal loans in particular. Failing to repay personal loans on time can lead to a situation known as a personal loan default. Such a scenario is often ignored until it is too late, carrying dire consequences for the financial well-being of an individual and future borrowers.
In this blog, we will discuss the meaning of personal loan defaults, various forms of personal loan defaults, the consequences of personal loan defaults, and provide tips on preventing or effectively dealing with such default cases.
What is Personal Loan Default?
A personal loan default is considered to have occurred when a borrower fails to meet all repayment obligations as specified in the loan agreement. Usually, lenders provide a certain grace period; if the borrower fails to make the repayments even after that, a default is considered to have taken place. This default behaviour also incurs penalty charges and legal issues; worst of all, it tarnishes the borrower’s credit profile.
Apart from a secured loan, a personal loan is mostly unsecured; that is, no collateral is involved. Because of that, the lenders regard this type of loan as riskier, and for these reasons, the aspects of recovering a default regarding personal loans remain harsh.
What Happens When You Default on a Loan?
Missed a payment and suddenly set off a chain of negative events. The impact can be immediate and long-lasting.
Impact on Credit Score
What can be directly affected by a loan default is your credit score. Missed EMIS and default reports are retained in your credit history, which can make it difficult for you to qualify for any future credit extended.
Legal Repercussions
After a certain duration of non-repayment, the lender may institute legal action. The borrower may be ordered by the courts to repay, and in severe cases, property or accumulated funds may be seized.
Asset Losses (in Secured Loans)
Here, it will not apply to personal loan defaults since personal loans have no collateral; however, tangible secured loans, such as home or auto loans, may be subject to seizure of the asset.
Higher Future Borrowing Costs
If you ever defaulted, lenders might now categorise you as a high-risk client. In any case, you would later be opting for an extremely high interest rate on the loans.
Stress on Co-Borrowers
If someone has co-signed or guaranteed your loan, then the onus also falls on them. Their credit score also tends to take a hit, resulting in some strained personal relationships.
Employment Challenges
The employment landscape is one where illicit financial listings can deter employment opportunities, to the advantage of candidates claiming to possess a ‘clean credit history’- a must for jobs in economic sectors or government employment. Anything on your credit report indicating default of payment will cause you to lose out on a golden job opportunity.
Measures to Avoid Defaulting on a Personal Loan
Avoiding default on a personal loan requires more than just punctual payments. Avoiding such defaults requires good financial and proactive management skills. Below are practical ways designed to reduce the risk of default:
1. Budget Your Finances Wisely
You should track your monthly income and expenses. Set aside a portion of your salary for EMIS and avoid excessive spending.
2. Borrow Only What Can Be Easily Paid Back
This is not about the lender sanctioning a loan amount that exceeds your repayment capacity. Stick to assessing repayment capacity.
3. Set Up Automatic Payments for Your EMI
Activate the auto debit facility to ensure timely payment of your EMIS without missing due dates. This avoids penalties and encourages discipline.
4. Create an Emergency Fund
When things go wrong, such as an unforeseen medical emergency or sudden job loss, having a contingency of 3-6 months’ worth of expenses can save you a significant amount of money. Security is a good reason to ensure that you won’t skip your EMIS.
5. Contact Your Lender
If you’re temporarily in trouble, consider discussing restructuring options or EMI holidays with your lender in truly deserving cases.
6. Use Loan Management Tools
Set reminder alerts on your calendar to notify you before EMI due dates. Awareness of the repayment schedule is already half the battle.
7. Diversify Your Income Sources
Earnings, which can come from freelancing, part-time jobs, or returns from investments, can assist you during downtime.
8. Keep an Eye on Your Credit Report
The more frequently you check your report, the sooner you will find a missed payment or an error that can be rectified and will be resolved before turning into a problem.
Taking charge before time runs out
Worrying may not get you anywhere; if the default on a personal loan has already set in, this is the moment to take action, or, as they say, “get off your rear.” Assess how far you’re behind, then consider:
- Debt consolidation, which combines various loans into one, gives you a manageable EMI.
- A restructuring with the lender that comes with better terms.
- Credit counselling to learn what’s best for you as you move toward your recovery.
By ignoring your default, you are inadvertently exacerbating the situation. Being early and assertive is all that counts.
Borrow Sensibly with Assistance at Stashfin
From an early stage, every decision following a personal loan default is critical for your financial soundness and creditworthiness. Being informed and acting as early as possible brings you from recognising the early warning signs of distress to practical considerations of staying on track.
Those in the market for a flexible instant personal loan should look no further than Stashfin as an acceptable financial partner. The unsecured loan amounts are made available to a maximum of ₹5 lakhs with minimal paperwork and quick approvals, so that you’re never left stuck when it matters most. Whether it’s an emergency or a lifestyle need, transparent processes, flexible repayment options, and low-interest charges make it easy for you to borrow. If you’re looking for a seamless experience, Stashfin’s easy and efficient mobile app, combined with an all-around customer service team, is your helping hand in making you financially stronger.
