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Failing to repay a personal loan can lead to significant financial repercussions and negatively impact your credit score. Furthermore, the failure to repay your loan can lead to unnecessary stress. Waiting to communicate with your lender after missing a payment only compounds the anxiety over time. Here are some of the key consequences:
- Impaired credit rating: This is arguably the most severe consequence. Late or missed payments are reported to credit agencies, causing a substantial drop in your credit score. A diminished credit score can make it challenging to secure future loans, credit cards, or even to rent an apartment.
- Rising expenses: Defaulting frequently sets off a chain reaction. Late fees, default penalties, and collection costs accumulate on the outstanding balance. Additionally, the interest rate on your loan may increase, leading to a higher overall amount owed.
- Debt collection: The lender might transfer your debt to a third-party collection agency, which can aggressively chase you for repayment. This can be a source of significant stress and harassment.
- Legal proceedings: In severe situations, the lender might pursue legal action to reclaim the debt. This could lead to a lawsuit, wage garnishment, or potentially asset confiscation (depending on whether the loan was secured).
Here are some further considerations to keep in mind:
- The gravity of the repercussions varies based on the length and extent of the default. A single missed payment may have a lesser impact compared to multiple missed payments.
- The legal repercussions can differ based on your location.
How to avoid this financial fix?
Only borrow what you truly need and can easily repay within the loan period. Avoid the temptation to borrow excessively based on the lender’s pre-approval. Many people underestimate the consequences of accumulating debt until the loan recovery team starts pursuing them. Some essential steps taken can help prevent this financial predicament.
- Open communication: If you anticipate challenges in repaying, reach out to your lender as early as possible. They may provide options such as loan modification or consolidation to help alleviate the situation.
- Budgeting and planning: Establish a practical budget and adhere to it. Look for opportunities to boost your income or reduce unnecessary expenses to ensure prompt payments.
Defaulting on your loan should never be your initial choice. Strive for a debt-free life by being proactive in repaying your loans on time and actively seeking solutions with your lender to regain financial stability.
Frequently Asked Questions (FAQs)
Q. Does failing to repay the loan impact your credit score?
Lenders regularly report your repayment habits to credit bureaus, which in turn factor this information into your credit score. Therefore, failing to repay a personal loan can negatively impact your credit score if you are not diligent about it. Each missed equated monthly instalment (EMI) can reduce your credit score by 50-70 points. Consistently defaulting on loan repayments can result in lasting damage to your credit rating, making it more challenging to improve it.
Q. Does failing to repay debt make it harder to obtain new loans?
Missing a personal loan EMI can severely affect your credit report, making it challenging to obtain loans in the future. Missed EMI payments are reported to credit bureaus, resulting in a significant drop in your credit score. A diminished credit score indicates greater risk to lenders, impacting your borrowing capacity.
If the default persists for over 180 days, the lender may label your account as “written-off” and report it to credit bureaus. This designation serves as a warning sign to potential lenders, suggesting a track record of non-payment.
With a poor credit score and a “written-off” label, obtaining future loans becomes extremely challenging. Lenders may decline your application or propose loans with substantially higher interest rates due to the perceived risk.
Q. How to secure a personal loan without documentation?
It may sound unconventional, but some lenders allow prospective borrowers to access personal loans based solely on their past financial history and relationship with the lending institution. Here’s how you can also apply for a personal loan without any documentation.
- Ensure you maintain a strong credit score
- Strive to maintain a low debt-to-income ratio
- Build a positive relationship with your lender
Q. Can you get a personal loan with a low CIBIL score?
Obtaining a personal loan with a low CIBIL score can be difficult, but it’s not out of the question. Here are some tactics you can use:
- Having a creditworthy co-applicant with a high CIBIL score can greatly enhance your application. The co-applicant shares equal responsibility for loan repayment, thereby, assuring the lender. If a co-applicant is not an option, a guarantor who guarantees your repayment can also be beneficial.
- Showcase a consistent income with a low debt-to-income ratio. This assures lenders of your capacity to handle repayments along with your current financial commitments.
- Be ready to provide additional documents such as income tax returns or salary slips to strengthen your financial position.
- Non-banking financial companies (NBFCs) may offer more lenient eligibility criteria compared to conventional banks. They might entertain your application even with a lower CIBIL score, but the interest rates could be higher.
- Microfinance institutions serve individuals with limited credit history or lower CIBIL scores. However, the loan amounts typically are smaller.
Q. How does a consistent income status assist in obtaining a personal loan?
One method to secure a personal loan with a low credit score is by demonstrating your financial stability to the lender. If you’ve recently received a salary increase or have an additional income stream, the lender might evaluate your application favourably despite the low score. Providing proof of a steady job and income can enhance the chances of loan approval, as it shows a greater capacity for repayment. However, you may be subject to a higher interest rate on the loan.
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Published: 15 Apr 2024, 08:58 PM IST
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