In India if you default on a personal loan, it can have a long lasting negative influence on your credit profile and your creditworthiness. Credit bureaus such as TransUnion CIBIL, CRIF High Mark, Equifax and Experian among others maintain records of such defaults for up to seven years from the date of the first missed payment.
Therefore, this one missed payment will stick on your credit profile for about seven years. That is why whenever you apply for any new credit line during the next seven years or so, such as a new personal loan or a credit card, this missed payment or default will be visible to the financial institution which will provide you with the credit line.
Impact on creditworthiness
A default mark on a credit report significantly damages an individual’s credit score, thus making it very challenging to secure new personal loans, home loans, premium credit cards or other credit facilities.
Furthermore, even if the outstanding credit demand is settled later on, still the default record remains as it is for several years to come. This has the potential of pushing interest rates on any future loans to a much higher level or even an outright rejection of credit applications.
Steps to mitigate the impact
- Prompt and sincere repayment: Focus on clearing outstanding dues as soon as possible. This can prevent further erosion and damage of your credit profile.
- Obtain a no dues certificate: After repayment and final clearance request for a ‘No dues certificate’ from the lender to have proof of the closure of the loan.
- Consistent credit report checking: Review your credit report on a periodic basis. This will help you ensure accurate reflection or repayments and to identify any flaws or discrepancies.
- Resolution of disputes:If inaccuracies and problems are found in your credit report, raise a dispute with your respective credit bureau, thus providing all the necessary documentation for correction.
- Avoid multiple loan applications: Refrain from applying for multiple credit products in a very short span of time. As repeated hard inquiries on your credit profile while processing your loan can further reduce your credit score.
- Build a positive credit trail: You can use secured credit cards i.e., cards backed by fixed deposits or small consumer loans and repay them on time to gradually restore a sincere repayment history.
- Maintain a healthy credit mix: To further boost your credit profile, you can also try to forge a combination of secured and unsecured credit products. This can show lenders your ability to manage diverse credit types efficiently.
It is equally crucial to acknowledge that while the default on a credit payment remains for years to come.
Still, its impact and influence on one’s credit score diminishes over time, especially if the borrower demonstrates responsible credit behaviour and inculcates focused repayment practices post default.
Regulatory oversight
The Reserve Bank of India (RBI) has mandated all financial institutions along with asset reconstruction companies (ARCs), to standardise their credit reporting procedures and practices. This has been done to ensure accuracy and complete fairness in credit assessments.
Therefore, it is clear that a personal loan default can negatively impact one’s credit profile for up to seven years, proactive measures such as obtaining necessary documents, on time loan repayments, regulatory monitoring can all help in mitigating its impact.
Hence, maintaining financial discipline and complete transparency with lenders is extremely important in rebuilding creditworthiness over time.
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