A personal loan can be really helpful during emergency contingencies such as education costs and other personal things. But what if repayment of the loan does not occur? Will it be legalable or shall you find yourself in jail?
If repayment laws and regulations concern you, this guide will clarify the doubts surrounding all that it entails in a world where one might default in the payment of a personal loan.
What is a personal loan?
A personal loan refers to unsecured or secured borrowing that is taken out for personal purposes like medical expenses, weddings, vacations, or debt consolidation. It is different from home or car loans in that it does not require the backing of any collateral.
Types of Personal Loans:
- Unsecured Personal Loan – No collateral is needed. It depends on your credit score, income, and capability to repay.
- Secured Personal Loan – Requires one asset as collateral, for example, property or gold. If you default, the lender can seize that asset.
What Happens If You Fail to Repay a Secured Personal Loan?
If you have taken a secured loan, then you shall have signed a legal agreement under the Indian Contract Act of 1872. Now, about any missed EMI, what can happen is:
- Bank Contacts You – A Few calls or messages will remind you of the lender to pay.
- Legal Notice Sent – If still, payments are still missed, a formal document is issued.
- Cheque Bounce Case (Section 138, Negotiable Instruments Act) – If your EMI cheque bounces, bank can file a case. It may lead to fines or even imprisonment (up to two years).
- Property Auction – The bank has the right to put the asset you have mortgaged for recovery of the loan on sale.
Key Takeaway: Defaulting on a secured loan will not directly land you in jail, but a cheque bounce case can do that. Always ensure you have sufficient funds in your account!
What Happens If You Default on an Unsecured Personal Loan?
Since unsecured loans have no collateral, banks rely on legal and recovery means to get back their money.
Measures Taken by Banks:
- Reminder Calls & Notices – They will repeatedly follow up.
- Damaged Credit Score – Your CIBIL gets penalized heavily, making it very hard for you to take future loans.
- Loan Recovery Agents – These agencies can contact you, provided they are compliant with the RBI Guidelines.
- Debt Settlement Options – The Bank may provide you with a different repayment scheme.
- Legal Action (Civil Case) – The bank can sue you in court of law, but defaulting will not land you in jail.
Note: Effect of being exposed to continuous defaulting. Normally, jail sentences are rar,e and there can be consequent legal harassment, a freeze on all your assets, or travel bans.
Can You Go to Jail for Not Paying Back a Loan?
No, it is not possible to land oneself in jail by just not repaying a personal loan; it is a civil issue and not a criminal one. However:
- Imprisonment can take place due to cheque bounce cases (Section 138).
- Fraudulently borrowing by way of intentional default can lead to legal action.
- Talk to your bank if you are having financial issues; they may rework your loan for you.
Read Also: 8th Pay Commission: Major Update for 1.2 Crore Central Employees, Big News!