Get the Tata Capital App to apply for Loans & manage your account. Download Now

Blogs

SUPPORT

Menu  
 
Apply Now
Apply Now

Tata Capital > Blog > Loan for Education > Education Loan Defaulter Legal Action: What Happens If You Don’t Pay in India?

Loan for Education

Education Loan Defaulter Legal Action: What Happens If You Don’t Pay in India?

Education Loan Defaulter Legal Action: What Happens If You Don’t Pay in India?

Education loans have become an integral part of many students’ lives, especially those who plan to pursue higher education abroad. These loans provide financial assistance to students and their families, enabling them to cover the cost of tuition fees, living expenses, and other educational requirements. While education loans offer flexibility in terms of repayment, there can be serious legal consequences for borrowers who default on their loan obligations.

Legal action against education loan defaulters

What happens if education loan is not paid? Legal action against education loan defaulters can be initiated by lenders when borrowers fail to repay their loans within a specific period. In India, the legal framework for dealing with defaulted education loans is governed by the Negotiable Instruments Act of 1881. According to this act, if a borrower fails to make payments for more than 180 days, the lender has the right to take legal action under Section 138 of the Act.

It is important to note that not all defaulters will face legal action. Lenders typically classify borrowers as either “wilful defaulters” or those facing unavoidable circumstances. A wilful defaulter is someone who intentionally avoids repaying their loan despite having the financial capacity to do so. On the other hand, borrowers facing unavoidable circumstances may be unable to repay due to factors beyond their control.

Also, read – Personal Loan Defaulter: Legal Action & Consequences in India

Immediate consequences of missing education loan payments in India

If education loan not paid in India, the impact can be felt sooner than many borrowers expect. One of the first things that happens is the loan account is marked as overdue. Even a single missed EMI can attract late payment charges, increasing the overall repayment burden. This answers a common concern: what happens if an education loan is not paid on time: Costs start rising immediately.

Another immediate consequence is its effect on your credit score. When an education loan is not paid for consecutive months, lenders report the default to credit bureaus. This can lower your credit score, making future borrowing, such as home loans, car loans, or even credit cards, more difficult and expensive.

Borrowers often ask, what if education loan is not paid during the early stages of repayment. Lenders usually begin with reminders through calls, messages, or emails. While these are meant to prompt repayment, continued non-payment may lead to the account being classified as a Non-Performing Asset (NPA), typically after 90 days.

In some cases, lenders may also approach the co-applicant or guarantor for repayment, as they share responsibility for the loan. While legal action is not immediate, education loan not paid for an extended period can eventually lead to recovery proceedings. Acting early by communicating with the lender or seeking restructuring can help manage these consequences effectively.

Legal consequences faced by education loan defaulters in India

Let’s have a closer look at the legal consequences faced by education loan defaulters in India when considering what if education loan is not paid:

1. Impact on credit score

One of the immediate repercussions of defaulting on an education loan is a negative impact on your credit score. Your credit score is a numerical representation of your creditworthiness and plays a crucial role in determining your eligibility for future loans and credit cards. Defaulting on any type of loan, including an education loan, can significantly lower your credit score.

A low credit score makes it difficult for you to obtain credit in the future as lenders consider you a high-risk borrower. This can hinder your ability to secure a home loan, car loan, or any other type of financing. It is important to note that a poor credit score can have long-term consequences on your financial well-being.

2. Repetitive reminders from the lender

When a borrower defaults on their education loan, lenders start sending reminders and notices to collect the outstanding amount. Initially, the borrower receives gentle reminders within 90 days of non-payment. If the borrower still fails to make the payments, further action may be taken by the lender.

The lender can mark the borrower as a Non-Performing Asset (NPA) if the EMI payments are consistently delayed or not made at all. Being marked as an NPA can severely impact your creditworthiness and future borrowing capacity. Additionally, lenders may charge penalties and take legal action against defaulters to recover the outstanding amount.

3. Penalties and legal action

If a borrower continues to default on their education loan, lenders may impose penalties and initiate legal proceedings against them. The penalties imposed can vary depending on the terms and conditions of the loan agreement. These penalties can include additional interest charges, late payment fees, or even repossession of collateral provided as security for the loan.

Legal action can be initiated by filing a case against the defaulter under Section 138 of the Negotiable Instruments Act of 1881. This legal proceeding can result in significant financial and reputational damage for the defaulter.

It is important to note that while legal action is a possibility for education loan defaulters, it is typically seen as a last resort for lenders who have exhausted all other options for recovering their funds.

Rights of education loan defaulters in India

Even in cases where borrowers default on their education loans, they still have certain rights that cannot be compromised. 

These rights ensure fair treatment during the loan recovery process:

1. Right to notice

Borrowers must be given adequate notice before any possession or recovery proceedings are initiated by the lender. This allows the borrower an opportunity to rectify the situation or negotiate alternative repayment options.

2. Right to fair value

If the lender repossesses any assets provided as collateral, they must inform the borrower of the sale price evaluated for those assets. This ensures transparency and fairness in the recovery process.

3. Right to be heard

Borrowers have the right to raise objections and present their case if they receive a notice of repossession from the lender. This allows them an opportunity to explain any extenuating circumstances or negotiate a repayment plan.

4. Right to claim the balance

In cases where lenders recover more than the outstanding loan amount by selling repossessed assets, borrowers have the right to claim any surplus amount left after settling the debt.

5. Right to be treated politely

Lenders are required to treat borrowers with respect and dignity during the loan recovery process. Borrowers should not be harassed, humiliated, mistreated, or abused at any point.

It is important for both borrowers and lenders to understand and respect each other’s rights throughout this process. Open communication and negotiation can often lead to mutually agreed-upon solutions that benefit both parties involved.

Education loan settlement: Procedures, rules, and RBI guidelines

When borrowers face long-term financial stress, education loan settlement is often explored as a last-resort option. Many borrowers worry about if education loan not paid in India and whether settlement is legally allowed. While the RBI does not have a separate, fixed “education loan settlement scheme,” it allows financial institutions to frame settlement or compromise policies under their internal recovery guidelines, especially for stressed or non-performing accounts.

So, what happens if education loan is not paid for an extended period? After continuous defaults, the loan may be classified as a Non-Performing Asset (NPA). Once an account becomes an NPA, lenders may consider one-time settlement (OTS), where the borrower pays a lump sum that is lower than the total outstanding amount. This usually includes a negotiated portion of the principal, with part of the interest or penalties waived.

Borrowers often ask, what if education loan is not paid due to genuine hardship such as unemployment, illness, or income loss. In such cases, lenders may first suggest restructuring, moratorium extensions, or revised repayment terms before settlement is considered. Settlement is generally offered only when recovery through regular repayment seems unlikely.

It is important to note that education loan not paid and later settled still affects the borrower’s credit history. Credit reports typically reflect the loan as “settled” rather than “closed,” which can impact future borrowing. Therefore, settlement should be chosen carefully, after discussing all alternatives with the lender and understanding long-term financial implications.

Conclusion

Defaulting on an education loan can have serious legal consequences in India. It is crucial for borrowers to understand their rights and responsibilities when taking on such loans. By making timely repayments and maintaining good communication with lenders, borrowers can avoid legal action and protect their financial future.

If you find yourself facing difficulties in managing your education loan repayments and worrying about “what happens if education loan is not paid?”, it is advisable to reach out to your lender before defaulting on your payments. Many lenders offer options for loan restructuring or modifying repayment terms based on individual circumstances.

Remember, education loans are meant to provide opportunities for students’ academic growth, not burden them with financial stress. By being proactive and responsible in managing your education loan, you can secure a brighter future for yourself without facing legal repercussions.

To learn more about education loans and explore your options, check the Tata Capital loan App.

Apply for Education Loan

Add wings to your dream. Apply for an Education loan!

Apply now
Popular Searches
Education Loan for B.Sc Education Loan for BA Education Loan for PhD What is Margin in Education Loan Education Loan for Nursing Vidya Lakshmi Portal Education Loans for Girl Students in India Courses Eligible for Education Loan Education Loan Against Property 10 Best Loan Apps For Students
More About Loans
Education Loan Documents required for Education Loan Education Loan Interest Rates Education Loan EMI Apply for Education Loan Education Loan Eligibility Creteria Education Loan After 12th Education Loan Disbursement Process Education Loan for Abroad Studies Education Loan Moratorium Period

FAQs

What legal action can a loan defaulter take?

As a defaulter, you can request restructuring, negotiate terms, or apply for a one-time settlement. Courts may allow repayment flexibility if you show genuine financial hardship.

Can a loan defaulter go to jail?

No, you won't go to jail just for defaulting on a loan. Jail time only applies in fraud cases or if you issue cheques that bounce.

What are the new RBI rules for defaulters?

The RBI now requires lenders to label willful defaulters within six months of a missed payment. It also tightens rules around audits and prevents them from getting fresh loans.

What legal action can banks take if education loan is not paid in India?

 

If education loan not paid in India, lenders may issue legal notices, classify the account as NPA, involve recovery agents, or initiate civil recovery under SARFAESI (if applicable). Criminal action is rare unless fraud is involved.

Will I be sent to jail for defaulting on my education loan?

 

No. If education loan not paid in India, it is usually a civil matter. You are not jailed for genuine default. Imprisonment applies only in cases of wilful fraud, misrepresentation, or cheque bounce with intent.

How does an education loan default affect my credit score and future loans?

 

When education loan not paid, defaults are reported to credit bureaus, lowering your CIBIL score. This makes future loans, credit cards, or even co-applicant approvals difficult and may lead to higher interest rates.

Can education loan be settled, and how does settlement affect my CIBIL score?

 

Yes, if education loan not paid for long and becomes NPA, financial institutions may allow settlement. However, the credit report shows “settled,” not “closed,” which negatively impacts your CIBIL score and future borrowing ability.

What are my rights as an education loan defaulter in India?

 

If education loan not paid, you have the right to respectful recovery practices, written notices, restructuring requests, and grievance redressal. Lenders must follow RBI guidelines, and recovery agents cannot harass or threaten you.

Disclaimer

Most Viewed Blogs

Trending Blogs

Calculator

Personal Loan EMI Calculator

Personal Loan EMI Calculator
Home Loan EMI Calculator

Home Loan EMI Calculator
Business Loan EMI Calculator

Business Loan EMI Calculator
Used Car Loan EMI Calculator

Used Car Loan EMI Calculator
Two Wheeler Loan EMI Calculator

Two Wheeler Loan EMI Calculator
Loan Against Securities Calculator

Loan Against Securities Calculator
Loan Against Property Calculator

Loan Against Property Calculator
More Tools
Our Subsidiaries
Our Private Equity Funds

Useful Links and Resources

Policies, Codes & Other Documents

Tata Capital Solutions & Services

Uh oh, something went wrong

Please try again later.

Most Important Terms & Conditions - Home Loans

Download in your preferred language

Download