What happens if you can't repay a personal loan? Learn how the bank handles recovery and when it takes legal action.

Delaying or defaulting on a personal loan can be a major setback for anyone. It not only impacts their financial situation but also impacts their future financial goals. Banks take action in such cases according to RBI regulations. Learn about the step-by-step bank process, RBI rules, and what's the safest route for you.

Personal loans have become the easiest option these days for those who need money suddenly—whether for a wedding, medical expenses, or to pay an important bill. Since they are unsecured loans, banks offer them without any guarantee or security. But this seemingly easy loan can sometimes become a significant problem, especially if you're unable to pay the EMIs on time.

In case of loan default, the bank isn't limited to phone calls. Under the rules, the bank can send a notice to the borrower, send a recovery agent, and even take legal action if necessary. Let's understand this in detail:

1. Personal Loan is Unsecured, Yet the Bank Can Take Action

A personal loan is unsecured, meaning no property needs to be collateralized. However, this doesn't mean the bank can't take action against the borrower in the event of a default. Keep in mind that personal loan interest rates are quite high, so missing repayment can be costly.

2. When do you become a loan defaulter?

According to RBI regulations, if a borrower misses three consecutive EMIs, they are listed as defaulters. However, the bank doesn't take any strict action immediately. First, they send a reminder notice and impose late payment charges. After this, they attempt a resolution through negotiations.

3. When are legal steps taken?

If there's no response from the customer or the bank doesn't get its money back, the matter becomes serious. In such a situation:

The bank may seek the help of recovery agencies.

Agents may call or visit your home to ask for payment.

If the loan is still not repaid, the bank may file a case in court.

Money can be deducted directly from your salary upon court order.

4. Direct Impact on CIBIL Score

Defaulting on a personal loan damages your credit history.

Your CIBIL score drops, which could lead to any bank or NBFC refusing to grant you a loan in the future.

Even if you repay the loan later, a blemish remains on your repayment history, which could become a hindrance in the future.

5. What to do if you are unable to pay EMIs?

If you are unable to pay EMIs for any reason, first contact your bank.

Request restructuring or a moratorium from the bank.

Do not ignore any legal notices.

Seek advice from a financial advisor if necessary.

Changes to your EMI plan can also be made by talking to the bank.

6. No need to panic, understanding is key

The bank's goal is to recover the loan amount, not to intimidate anyone. Therefore, remain calm and communicate with the bank and present your case appropriately. By taking timely action, you can avoid becoming a defaulter and secure your financial future.

FAQs

Q1. Can a bank send you directly to jail for not repaying a personal loan?

No. The bank cannot send you directly to jail, but it can file a case in court. If the court orders, money can be deducted from your salary.

Q2. How many points can your CIBIL score drop for not paying your personal loan EMI?

Consistently missing EMIs can cause your CIBIL score to drop by 50 to 100 points, which could lead to rejection of future loan applications.

Q3. Is there an option to get your EMI reduced from the bank?

Yes, restructuring or EMI rescheduling can be done by talking to the bank, especially if the reason is temporary.

Q4. Does your CIBIL score improve even after closing a personal loan?

Yes, if you repay the remaining loans on time, your score will gradually improve.