Personal loan EMI: What to do immediately after defaulting on a loan? Find out

Mint

3 days ago

The Indian banking sector is currently facing a significant uptick in personal loan defaults, most notably in small-ticket loans and rural regions. According to data compiled by the Fintech Association for Consumer Empowerment (FACE), loans overdue for more than 90 days climbed to 3.6% by March 2025. This is the highest in six quarters.
Further, the stress is particularly acute among borrowers under the age of 25 and in tier-3 and rural areas, highlighting the challenges faced by young and new-to-credit consumers as financial obligations intensify.
Private banks saw bad loan ratios edge up in the April–June 2025 quarter, with Kotak Mahindra Bank's NPA rising to 1.48% and similar stress across the sector. Banks are now focusing on tightening lending, especially for unsecured loans, making it riskier for borrowers.
Therefore, in such an environment, missing out on an EMI can hurt creditworthiness and future loan access. Let us hence discuss how a borrower can navigate the current financial climate after defaulting on a personal loan.
After defaulting, prompt action is required to limit damage to both your credit profile and borrower integrity. To ensure the same, consider these essential measures: Communicate early with your lender to explain the financial hardship and seek possible relief, such as restructuring or deferred payments. This is very important; ensure that you open up a channel of communication with your respective lending institution. Check for eligibility for EMI holidays or temporary payment deferral. For this, you must reach out to the respective customer support team of your lending institution, so that you can get clear instructions and appropriate guidance on the issue. Explore debt consolidation options if juggling multiple debts. Debt consolidation simply helps in making the entire repayment process smooth and consolidates the loans into one. Seek support from credit counsellors before legal notices escalate. You can also reach out to qualified lawyers for legal help before things get out of hand. Maintain all communication records for future reference. This will be important if, later, your lending institution initiates recovery or takes legal action against you. Borrowers receive formal default notifications. This is followed by recovery agent visits under the RBI guidelines. In such a scenario, discussing the entire process with your respective lending institution is the best way to plan repayment.
Continued non-payment beyond 90 days reclassifies the loan as a Non-Performing Asset (NPA), allows lenders to send legal notices, and authorizes civil suits for recovery. Do keep in mind, the process of recovery, if initiated, can be draining emotionally; that is why be careful with debt management right from the start, so that borrowing remains a pleasant experience for you.
Penalties, increased interest, wage garnishments, or even asset seizures may be the consequence of defaulting on your personal loans. Your credit scores can plummet by over 150 points within six months, making future loans, credit cards, or other credit instruments very difficult to secure.
The Reserve Bank of India encourages amicable settlement of such recovery processes. It mandates fair practices from lenders during the settlement process. That is why early negotiation can sometimes even result in loan restructuring or one-time settlements.
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