Dear friend,
First and foremost, you need to tell us whether you have a policy on the disbursement of loans to the employees. In case, you do not have such a policy, then did you make any agreement on the method of returning the loan? In case, if you have not made this agreement then you have increased your trouble because of a lack of documentation.
If the loan was given to the employee, then from the next month onward, the instalment gets deducted. Are you deducting the portion of the loan? If not, why?
Did the employee agree to pay the entire amount in a single instalment? If yes, and if he has failed to do that, then what kind of correspondence have you done with the employee? What is his justification for non-payment of the loan?
You may terminate the employee, however, before that it is better if you conduct the domestic enquiry. Let the facts be established properly and then take disciplinary action.
Thanks,
Dinesh Divekar