loan default

What happens when a borrower fails to repay a loan?

There are critically two significant consequences of failing to repay your debt.
The first one is that your credit score will take a beat. All credit-related information of the owner and credit card user is sent to CIBIL and other credit rating agencies. They would know your credit history from head to toe. We all know that every loan nowadays is been approved based on the credit history of the borrower. While if you are defaulting your payments, your credit score will take a hit. And this will make it difficult for you in the future if you would want to apply for a loan again.

Second, the lender can auction the property which was used as collateral for the loan after following the due legal process.
The bank will send first notice to the borrower mentioning the due amount with interest. If the bank realizes that the customer is willingly delaying the repayment, then it could lead to legal proceedings. The follow up from the bank will start soon as a single repayment is missed. The legal procedures will not emerge when the customer is willing to repay the amount after a break. (Sometimes there are situations like death, illness, or accidents that can cause a break in the repayment of the loan amount. So, in this case, banks will give holidays to the customer or his family. Also, as per the guidelines of the Reserve Bank of India, banks should provide time to the customers to pay the loan amount. And should not use their muscle power to recover the loan amount.)

Here are a few options to try in case you have defaulted on your loan:

There must have been a reason when you default a loan. Right?
Might have lost a job or paid an education need for children or simply an emergency, which must have caused you money shortage.
So there is no need to worry for this reason if you are unable to make your payments. Here are the options you may consider:

  • Reducing your EMI

If you’re struggling with the EMI amount, you can approach the lending institutions and request them to increase your loan tenure. In this case, it would reduce your monthly EMI amount, but it might end up paying a higher amount of interest. Also, all borrowers have the right to approach banks if you are facing any difficulty while repaying installments. After a discussion with the concerned representative in the bank, you can choose the option to restructure their debt.

  • Defer your payments

You can inform the bank about the incapability to make payments temporarily and can seek an EMI holiday for a few months. Bank can accept these reasons but may impose penalties for the same.

  • One time settlement

It 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 company may have already classified as a non-performing asset at this point. The borrower is considered bankrupt or in no position to make further payments. He may get the option to settle the loan with a small amount.

  • Getting back to the financial health

One should analyze the situation and should have a realistic estimate as to when you can start repaying your loan and treat it as a priority. Work with the bank and work out a time-frame for your repayment. If your reasons for not paying up are genuine, the banks usually give you a specific time for repayment. And finally, control your expenses and prizes between essential and non-essential spending.

Regret is unnecessary. Think before you act.
William Shockley

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