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A Loan is an amount of money provided to the borrower by the lender with or without any collateral, with the promise of repayment of the initial amount borrowed along with interest. This way the borrower gets the money in the time of need, and the lender earns extra on the original amount through interest. The goal of a borrower in availing a loan is to make up for the cash crunch and the goal of a lender is to earn profits as interest on the loan. Taking a loan nowadays is not a difficult task and many people opt for their different needs such as to buy a home, to buy a car, to bear the marriage expenses, for higher education, for any emergency like to bear medical expenses. Taking a loan provides you desirable amount of money in an easy way which one can repay through EMIs (equated monthly installment) for this they charge a particular interest which you have to pay along with the principal amount. But when you opt for a loan a very important thing to keep in mind is that you should have a proper cash inflow. To have a proper cash flow is considered important because it shows one’s repaying capacity.
Credit Score Crashes
When a borrower defaults his/her loan repayments (EMIs) then as a consequence their credit score gets affected negatively. For all the borrowers, the lending institution sends their repayment records to CIBIL to and other credit rating institutions. As soon as the borrower defaults or delays his EMI, it is reported and as a result credit score comes down by some percentage. This also has a negative impact on future borrowing capacity. Whenever a person approaches a financial institution for any loan, their credit record is one of the thing is that the lenders consider. A record of defaults in the past and hence a lower credit score are considered credit risky profile by the lenders as there is a high chance of repetition of default or the borrower becoming a NPA, none of which a lender would want. However the final decision will be on the loan officer’s discretion. Hence even if such a borrower manages to get the loan, the interest rate charged will be definitely high in this case as compared to that of any other borrower with a good credit score and good repayment history.
You are Given the Benefit of the Doubt
All borrowers are provided with the opportunity and have the right to approach the bank if there is any difficulty in repaying the installments and to choose an option to restructure their debt to enable a smooth repayment process.
Preliminary notices are sent to the borrower mentioning the amount overdue with interest and penal interest. If the bank has reason to believe that the customer is willfully delaying the repayment, or if the customer has not come forward with a definite plan of action to repay the dues, the bank can opt for legal proceedings. If there is a guarantor, the bank might approach him, as according to the guarantor agreement, he is supposed to pay the loan when the applicant defaults.
The follow-up from the bank will start as soon as a single repayment is missed. But, further proceedings depend upon the customer’s approach to the issue and his current circumstances. The legal procedures will definitely not emerge out of the blue; it is a process resorted to if initial measures do not yield results.
There are situations like death, ill-health or accidents that can unintentionally break the repayment schedule. In such cases, banks will give justifiable holidays to the customer or his family.
The Reserve Bank of India’s guidelines says that banks should give reasonable time to pay up and also forbids using ‘muscle power’ to recover loans. There is a laid down code of conduct which banks need to adhere to.
Lender might resort to legal action
Not adhering to the reminders sets off a chain of events that usually starts with the bank taking to a legal notice issued to the borrower.
Can impose a penalty
In case of multiple loans, a lender can also impose penalty on the defaults and late payments. This usually applies to an unsecured loan where the lender doesn’t have any collateral as a guarantee against non-payment by the borrower.
Asset (collateral) is affected
Collateral is the last thing which is considered. In case when borrower is not able to repay the loan even after the legal notices and the last option left with the lender is to recover it through the collateral. In case if the borrower has given any property as the collateral in that case the ownership of the property will go to the lender and then the lender can sell the property and recover the loan amount.
As such, defaulting on your loan would not be a wise decision, if voluntary, But if the time is really tough, then what is a borrower supposed to do, especially when they have a justified reason for the non-repayment.
Steps to Take
There must be a reason why you haven’t paid your EMIs for a few months. You may have lost your job; you may have had an emergency which consumed all your savings; you may have paid a huge amount for your education, for your home, or some other urgent requirement.
Whatever may be the reason, if you’re unable to make your payments, you could consider one of these many options.
1. Defer your payments
You could inform the bank of your inability to temporarily make payments and seek an EMI holiday for a few months. A situation of this nature can occur during a job change or a temporary loss of business or employment. Banks can accept these as genuine reasons but may impose penalties for the deferment.
2. Reducing your EMI
If you are struggling with the EMI amount, consider having the monthly outgo reduced. You can approach the lending institution and request them to increase your loan tenure. This would reduce your monthly EMI amount though you may end up paying a higher amount in interest. Once your financial situation is sturdier, you should increase the EMI amount again.
3. Restructuring the loan
If a borrower is unable to maintain the terms and conditions of his loan, he can request the lender to relax the same. This may lead to a reduction of charges, lowering of interest rate, lengthening of the loan tenure, a moratorium on interest, etc.
4. One-time settlement
This option is usually exercised when a borrower is unable to repay his loan to the extent that his interest accrued is larger than the principal amount. The lending institution would have already classified the loan as a non-performing asset (NPA) at this stage. The borrower may be bankrupt or in no position to make further payments. He may get the option to settle the loan through a small payment. Recently, a bank offered a settlement offer to its NPAs in the education loan sector, in which up to 90% of the principal and 100% of the interest were waived off. But, exercise due caution accepting this offer: your credit report will reflect the fact that you could not repay your loan fully, and therefore your Credit Score will be affected.
5. Debt Consolidation
Debt consolidation is one of the method by which a borrower can come out of this situation. Debt consolidation is nothing but taking a new loan to repay all or most of the previous loans. It is considered best option in this situation. But when you go for debt consolidation loan always look for a loan in which the EMI along with the interest costs less than the total EMI you were paying for your previous loans. Personal loan is considered good in case of debt consolidation. The unsecured nature of the personal loan makes it easy for the borrower to avail and the high loan amounts offered make it possible to cover all other loans.