The Repercussions of a Personal Loan Payment Default

interest rate of Personal Loans
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A Personal Loan does come handy when you’re in need of funds at short notice. Such loans enjoy quick approval and minimum documentation coupled with the benefit of putting the loan to a use as per your individual needs.

On the downside, the interest rate of Personal Loans is pretty high —the reason being that these are unsecured loans.

The cost of a Personal Loan

The cost incurred includes the interest and the Personal loan fee and charges like processing fees and service charges. Generally, the processing charges is levied as a percentage of the loan amount. As long as you’re repaying loans on time, the loan is an ideal source to meet your requirement for funds.

However, if you default on the loan EMIs, you’ll have to pay a heavy penalty; both financially as well as suffer damage to your credit standing.

  • Penal Interest

Loan default leads to levy of penal interest. As such, personal loan interest rates are high. Additionally, late charges and penal interest can cause a heavy financial burden on you.

To cite an example; credit cards are a form of personal loan. Suppose you default on your credit card bills. At the end of your billing cycle, the outstanding balance is charged interest @3% per month which worked out to a whopping 36% per annum.

If you’re in the habit of delaying your credit card payments in full, you’ll be shelling out a heavy interest.

  • Damaged Credit Score

The biggest fallout of a loan default is a poor credit score. The details of all loans taken by you, the payments you’ve made towards personal loan repayment, the settlement towards credit card bills are reflected in your CIR (Credit Information Report).

A loan default can pull down your credit score making it difficult to obtain future loans. Not only are your chances to obtain a loan bleak, a low credit score can also affect buying insurance or getting utilities.

While a fall in credit score can happen just because of one instalment default, it can take over a year for you to improve your credit score.

Credit score has assumed prime importance when you take credit like loans and lenders are increasingly relying on credit scores to decide whether to approve your personal loan application.

Nowadays, the interest at which you avail loans are also dependent on your credit score. A good credit score can help you to get better personal loan deals.

  • Damaged Reputation

Despite reminders from the lender, if you do not repay the loan, collection agents will knock at your door and tarnish your image. Legal action will also be initiated. In addition to disrepute, you will have to bear legal expenses as well.

Loan default stories certainly don’t have happy endings. First and foremost, avoid availing loans unless you need them. If at all, you have to take a loan, make sure that you avail a loan which you can repay. Assess your cash flows as well as your credit score before you apply for a loan.

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One Thought to “The Repercussions of a Personal Loan Payment Default

  1. vishal

    Great! a very good article about personal loan. i want to know what is new in home loan after G.S.T.

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