What happens when you default on a personal loan?

Digital Personal loans are an effective solution for managing expenses, but failing to repay them on time can lead to severe repercussions. A personal loan default impacts your financial health, resulting in penalties, a lower credit score, and even legal action. Understanding the consequences of a loan default and taking steps to avoid it is crucial for maintaining financial stability. By planning wisely and leveraging tools like automatic payments, you can ensure timely repayments and avoid loan defaults.

When is a loan considered default?
 

A personal loan is considered in default when the borrower fails to make payments for a specific period — typically 90 days or more. Financial institutions usually classify overdue payments as follows:

• Missed payment: Delay in paying one EMI.
• Delinquent loan: EMIs overdue for a few weeks.
• Default: EMIs overdue for 90 days or beyond.

The exact timeline may vary depending on the lender's policies. Once the loan is labelled as defaulted, the lender initiates actions to recover the outstanding amount.

What happens when you default on a personal loan?
 

Defaulting on a personal loan has serious consequences, including:

1. Impact on credit score:

Your credit score drops significantly, affecting your ability to secure future loans.

2. Penalties and charges:

Lenders impose late payment fees and penalties, increasing the overall loan cost.

3. Legal actions:

If recovery attempts fail, lenders may initiate legal proceedings to reclaim the amount.

4. Asset seizure:

If the loan is secured, the pledged assets may be seized to recover the dues.

5. Visit from recovery agents:

Persistent defaults may lead to frequent calls or visits from recovery agents.

What to do if you are at risk of default?
 

If you find yourself struggling to make payments, take proactive steps to mitigate the situation:

1. Communicate with your lender:

Inform your lender about your financial difficulties. Many banks may offer flexible repayment options or temporary relief.

2. Request a restructure:

Ask for a loan restructuring plan to reduce EMIs by extending the loan tenure.

3. Consider partial payments:

If full EMI payments are challenging, explore making partial payments to avoid being labelled as a defaulter.

4. Consult a financial advisor:

Professional advice can help you prioritise expenses and manage repayments effectively.

How to avoid personal loan default
  

1. Set automatic payments
 

Automating your EMI payments ensures timely deductions from your account, reducing the chances of missed payments. IDFC FIRST Bank offers seamless digital solutions for managing EMIs, making repayment stress-free.

2. Choose a suitable loan term
 

Opt for a loan tenure that aligns with your repayment capacity. A longer tenure reduces EMI amounts, making repayments more manageable. With IDFC FIRST Bank's FIRSTmoney Smart Personal Loan, you can choose flexible tenures ranging from 2 months to 60 months, suiting your financial needs.

3. Maintain a budget
 

Allocate funds for loan repayments in your monthly budget to prioritise your EMIs over discretionary expenses. To know your EMI amounts beforehand, use a personal loan EMI calculator while planning your loan.

4. Build an emergency fund
 

An emergency fund acts as a financial cushion to cover EMIs during unforeseen situations, preventing defaults.

5. Leverage loan features
 

Smart personal loans like FIRSTmoney offers several features like zero foreclosure charges to close the loan anytime without incurring any penalties for early repayment as well as competitive personal loan interest rates to keep your loan affordable so that you manage your loan efficiently.

Conclusion
 

Defaulting on a personal loan has far-reaching consequences, from financial strain to long-term credit challenges. Understanding when a loan is considered in default and taking corrective steps early can protect your financial health. With tools like automated payments, and features like flexible repayment terms, zero foreclosure charges, and competitive interest rates, IDFC FIRST Bank’s FIRSTmoney Smart Personal Loan helps you manage your commitments efficiently. Plan your finances carefully and remember — timely repayments pave the way for a secure financial future.