How Defaulting on a Personal Loan Affects Your CIBIL Score

Like all other financial tools, personal loans, too, play a significant role in an individual’s financial decisions. It allows them to obtain funds for financing recreational activities or for emergency purposes. Such as for medical reasons, apartment renovation, clearing debts or going on a vacation with your family and loved ones. 

Table of Content

• Solutions for defaulting on personal loans 
• How does defaulting on personal loans affect your CIBIL score?

Availability of personal loans has its own set of challenges, like timely repayments and other terms & conditions. However, if you are unable to adhere to the terms & conditions of your lender and default on personal loans, it could result in negative remarks on your credit history, eventually dropping your credit score significantly.

 This can make it tough for you to obtain loans in future. Nonetheless, timely repayments on personal loans can improve your credit score, which can result in better loan options in the future and enhance your credibility for a higher loan amount, lower interest rates and for a pre-approved instant personal loan.

Defaulting on personal loans comes with consequences, such as negatively affecting your credit score, being ineligible for additional credit until the loan is repaid and in some cases, even a lawsuit. So, if you are opting for a personal loan, ensure thorough research and compare the options to pick the best one. While you may try your best to avoid default, situations may arise where it may be unavoidable. Here's what you need to know in case you end up being a defaulter on personal loans.

Solutions for defaulting on personal loans

• Keep your lender informed – Informing your lender about the challenges that you are facing to clear your debts is probably one of the best things to do. Muthoot Finance and many other lenders offer the option to restructure your loan. This makes repayment more manageable, such as expanding the loan tenure, reducing the interest rate, or adjusting the principal amount. Moreover, transparent and open communication could prevent legal action against a personal loan defaulter.
• Getting assistance from professionals – Seeking assistance or consulting financial advisors and credit counselors for advice is another way to go about it. By evaluating your financial circumstances, experts may suggest strategies such as debt settlement, consolidation or developing a budget plan. With an expert’s guidance, you can prevent and find a better workaround in case of default on personal loans in the future. Eventually, this allows you to manage your overall finances better and more effectively.
• Explore and see if you can get support – Financial institutions such as NBFCs and banks, whether it is the public sector or the private, may have schemes right in place that offer some relief to personal loan defaulters. As a borrower, your job is to do research and see whether you are eligible to avail yourself of these schemes.
• Prioritise repayments – Consider focusing on your loan repayments first by reviewing and eliminating unnecessary expenses. Always remember that with careful planning and discipline, half of the challenges and problems associated with the execution of tasks are solved tentatively.
• File for bankruptcy – While this is not an ideal option to choose, as it can harm your credit score. Keeping this as the last resort may be the only option in case your financial situation is in a bad shape. However, we suggest that you consult an attorney before filing for bankruptcy. Additionally, ensure that you have a better understanding of the impact of filing for bankruptcy.

How does defaulting on personal loans affect your CIBIL score?

• Your payment history defines your credit score, and if your lender enters the default status even once, it could harm your CIBIL or credit score.
• Whether it is one or more late payments or a complete default, the negative report will reflect on your credit history for years.
• Besides affecting your credit score negatively, defaulting on personal loans could also limit the diversity of your credit mix.

Defaulting on personal loans comes with many consequences, such as impacting your credit score and making it challenging to secure loans in the future. This can also increase the financial burden because with a lower credit score, personal loan interest rates are higher.

In case you end up defaulting on a personal loan, with the help of Muthoot Finance, you can restructure your loan - a practical solution for individuals facing significant financial stress. By being aware of the available restructuring options and the steps involved, borrowers can make well-informed choices.