A vehicle loan default can be stressful because, for many borrowers, a car or two-wheeler is not just a purchase but a necessity for daily travel, family responsibilities or earning a livelihood.
However, missing an equated monthly instalment (EMI) does not automatically mean that a lender can immediately take away the vehicle.
Experts say lenders have to follow a defined process before repossession, and borrowers also have rights during recovery proceedings.
One missed EMI does not mean immediate repossession
A common concern among borrowers is whether a bank or finance company can seize their vehicle after missing one or two EMIs.
Experts say repossession is generally not the first step taken by lenders. “Missing one EMI does not usually lead to immediate repossession. Lenders typically issue reminders and notices before invoking the repossession clause under the loan agreement,” said Keyur D. Gandhi, managing partner, Gandhi Law Associates.
Shashank Agarwal, founder, Legum Solis, explained that loan agreements generally contain clauses related to default notices and recovery action. “As a first step, the lender is required to send a notice. According to Reserve Bank of India (RBI) circulars, banks and financial institutions cannot classify a loan account as a non-performing asset (NPA) until there are three continuous defaults or non-payment for at least 90 days,” he said.
This means borrowers usually get time to communicate with the lender, explore repayment options or seek restructuring before the situation reaches repossession.
“The biggest mistake borrowers make is avoiding communication. Early engagement with the lender often helps resolve the issue before repossession,” said Rakesh Kumar, founder and managing director (MD), Square Insurance Broking.
Lenders must follow due process before taking possession
Vehicle loans are usually secured against the vehicle itself through a hypothecation agreement, where the lender has a security interest in the asset until the loan is repaid.
Vipul Jai, partner, PSL Advocates & Solicitors, said the right to repossess comes from the loan agreement, but it cannot be exercised through arbitrary action.
“Recovery has to follow law, not muscle power,” he said.
According to Jai, borrowers must first be made aware of the default through proper communication. The lender’s loan agreement should mention the repossession process, including notice requirements and the steps that will be followed before taking possession.
Supriya Majumdar, partner, Elarra Law Offices, said borrowers should not ignore legal notices or communication from lenders. “Legal notices issued by lenders ought not to be ignored and must be dealt with to avoid any possible lack of defence and to explore the possibility of early closure of disputes,” she said.
Recovery agents cannot use force or intimidation
One of the biggest concerns for borrowers is dealing with recovery agents who may arrive at their home or workplace.
Experts said recovery agents cannot use threats, harassment or coercive methods.
“The borrowers have a right to receive the notice of default and the consequence thereof. If a recovery agent shows up without any notice, borrowers must file a complaint with the lender and, if required, approach legal authorities,” said Agarwal.
Jai said borrowers are entitled to fair and dignified treatment throughout the recovery process. “Banks and financial institutions cannot resort to coercion, intimidation, physical force, public humiliation or the employment of musclemen for recovery of dues,” he said.
Borrowers should verify the identity and authorisation of recovery agents, maintain records of conversations and preserve messages or other evidence in case of misconduct.
Majumdar advised borrowers to record important details during any possession action, including the condition of the vehicle and items inside it. “Any physical inspection or action for possession of the car must be video recorded for proof and borrowers should insist on preparation of a detailed inventory,” she said.
Can you get your vehicle back after repossession?
Repossession does not always mean the borrower permanently loses the vehicle.
“Even after repossession, borrowers may still settle the dues and reclaim the vehicle before auction, subject to the loan terms,” said Gandhi.
Experts said borrowers should act quickly because once the vehicle is sold to a third party through auction, recovering it becomes difficult.
“Till the time the vehicle is auctioned by the bank, the borrower can attempt to settle with the bank and take the asset back. However, once the vehicle is auctioned off to a third party, getting it back becomes nearly impossible,” Agarwal said.
Jai added that repossession is meant to secure recovery of the loan amount and does not eliminate the borrower’s remaining rights.
What happens if the vehicle is auctioned?
If the lender sells the repossessed vehicle, the process must be transparent. Borrowers are entitled to know details of the sale and how the proceeds were adjusted.
Majumdar said the sale should follow a fair process and borrowers should receive details of the sale proceeds and buyer information.
“If the sale proceeds exceed the outstanding dues and other contractual and legal charges, the excess amount must be refunded to the borrower,” she said.
However, if the sale amount is lower than the outstanding loan amount, the lender may still recover the remaining balance, depending on the terms of the agreement.
What should borrowers do if facing recovery action?
Experts suggest borrowers should:
• Respond to lender communication instead of avoiding calls or notices.
• Ask for written details of outstanding dues and recovery steps.
• Verify the identity and authorisation of recovery agents.
• Document any harassment or unlawful recovery attempts.
• Explore settlement or restructuring options before auction.
“Borrowers should stay in touch with the lender and explore settlement options before the matter escalates,” said Kumar.
A missed EMI can create financial pressure, but borrowers should know that recovery action has to follow a process. Understanding these rights can help them respond better and avoid losing their vehicle without exploring available options.