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What Happens if You Default on Your Personal Loan and It Becomes an NPA?

Submitted by admin on August 25th, 2025

Availing a personal loan is a great relief when in need of finance but there is also a responsibility attached. When you obtain a loan, it is expected that you will pay the money with fixed payments. When you are unable to do so the loan will become what is known as a Non-Performing Asset (NPA). It is quite important to realize what this implies and what effects it would have.

NPA What?

A personal loan is deemed to be an NPA in case you do not pay the equated monthly installments (EMIs) within a period of 90 days. To put it in simple terms, when an individual fails to remit the loan payments 3 times in a row, the bank or the financial institution marks its loan as being an NPA. This is considered as a red flag to the lender since the loan does not bring any form of active income to the lender.

Direct aftermath of Default

You would receive reminders in form of calls, emails or messages in case you miss one or two EMIs. They can also impose penalties of late payments and additional interest. However, in case the default spans after 90 days, then the case is graver. The bank classifies your account as an NPA and reports the same to other credit agencies such as CIBIL. This bad score instantly decreases your credit score so you will find it hard to borrow any kind of loan or credit card in the future.

Recoveries by the Lender

Once it turns into an NPA the lender initiates recovery actions. At first, your recovery agents may call you to remind or to pressure you to pay. Banks can also reorganize your repayment scheme in the case that you demonstrate inability to pay but a determination so to do. But in case even then you do not pay the dues, the bank can resort to legal proceedings under recovery legislation. In other situations, in case you had offered collateral they may take it and sell it in order to get their money back.

Impact on Your Credit Profile

Defaulting on a personal loan damage your financial reputation. A low credit score stays on your record for years. This makes future borrowing extremely tough. Even if a lender agrees to give you a loan later, it will likely be at a much higher interest rate. Employers and landlords sometimes check credit scores too, so it can also affect job opportunities and rental agreements.

Long-Term Financial Stress

Apart from financial penalties, the stress of dealing with recovery agents, legal notices, and a damaged credit score can be mentally draining. It affects not only your ability to borrow but also your confidence and peace of mind. Rebuilding your credit profile after a loan default takes time, discipline, and years of consistent repayment history.

Conclusion

Defaulting on a personal loan and allowing it to become an NPA can have serious consequences. It affects your credit score, future borrowing capacity, and even invites legal trouble. If you face financial difficulties, it is always better to talk to your lender early and request restructuring, reduced EMIs, or a temporary moratorium. Proactive communication can help you avoid slipping into default and protect your financial health.