Understanding the Impact of Loan Default On Personal Loan Approval

Today, availing a personal loan has become very common. People avail these loans for multiple purposes, be it buying a new piece of furniture or the latest gadget, going for a trip or paying utility bills. With instant loan apps making personal loans accessible in a few clicks, an increasing number of people are using this financial tool. However, a lack of awareness and financial knowledge has led many into the trap of loan default.

Whether you avail a salary loan or an online loan, paying your loan back on time is very crucial. Delaying your loan repayment even by a day can impact your financial record. But poor planning and reckless borrowing can make repayment a big challenge. 

Read on to understand the impact of loan default on personal loan approval.

What is a Loan Default?

When a person takes out a loan, they must pay it back in the form of EMIs, equated monthly payments made on a scheduled date. Now, missing out on the EMI for a day or two might incur a penalty but it does not result in a loan default. However, if you fail to pay the EMI for more than 90 days then it is termed as a loan default and it can impact your financial record very badly.

Impact of Loan Default

Loan default has several negative implications that last a long time. The following list includes a few of these effects.

  • Negative effect on credit score

The borrower’s credit score is the aspect that is most significantly impacted. Lenders evaluate a person’s credit score to determine creditworthiness. When loan EMIs are paid on time, the credit score increases and the borrower’s strong repayment potential is demonstrated. 

Yet, if the borrower misses a payment, their credit rating suffers. Lenders report loan defaults to credit rating agencies, and the credit report keeps the information on file for a few years. Poor credit score can affect your future personal approvals. It may either result in loan rejection or you may get a loan at a higher interest rate.

  • Limited future borrowing capacity

Many lenders prefer not to lend money to those with poor credit since doing so raises their risk. As a result, there is a strong likelihood that you will be denied a loan in the future. Though a few lenders including instant loan apps may approve your loan application, you may have to pay a high-interest rate. Thus, a loan default will affect your future personal loan applications.

  • Seizure of your collateral

In case, you have availed a secured personal loan or any other loan then a major loan default can result in the seizure of your collateral. That’s why it is important to plan well before applying for a secured personal loan as failing to repay the loan could lead to a loss in your property.

  • Higher debt burden

The first effect of failing to make your loan EMI payments is an increase in your loan load. You not only have to pay the loan EMI but also the penalty charged on the loan. This increases your repayment burden and the total amount paid against the loan. This further makes repayment difficult.

  1.   Legal action

In case of major loan defaults, which is more than 90 days, lenders might resort to legal actions. Legal cases can have an impact on your future borrowings. Many lenders will reject your loan application as they would consider you under the high-risk category. Hence, the chances of future personal loan approval are minimal.                      

Best Things To Do When you default on your loan

At times, you might find yourself in a tight financial spot even after prudent financial planning. In such times, here are a few things that you can do –

    • Approach the lender and reveal your financial situation. You may ask for loan deferment or restructure your personal loan.
    • You can talk to the lender about increasing the loan tenure and decreasing the EMI amount. This can help reduce the loan burden and pay off the debt with ease.
  • In the worst case, you can request the bank for a settlement. It means that you will make a partial payment of the outstanding balance. Though it can give you relief from the debt burden, it can have a negative impact on your credit health. 


It’s crucial to remember, though, that personal loans are a serious financial commitment that must be paid on time. Defaulting on a loan is always bad for your financial health. In worst-case scenarios, you can opt for loan deferment as it does not impact your credit score while giving you the needed time to recoup your finances. 

So, before you apply for an online loan or a salary loan through an instant loan app, make sure you have a solid repayment plan. 

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