Taking a loan is easier than it was before. So, the number of people taking loans has gone up. These could be loans for buying a car, a home or for marriage. The option of paying back the loan in easy EMIs is convenient. But even then, sometimes some people may not be able to repay their loan on time and might default on their loan. In case you default on your loan, here are the consequences and what you can do to rectify the situation.
Repercussions of default
There are two main repercussions of not repaying your loan. The first one is that your credit score will take a hit. Credit rating agencies collect information regarding loans and credit cards from financial institutions. Your loan or credit card application is approved only if you have a good credit score. Your repayment history is shared with credit rating agencies. In case you default on your loan, this will be reported to credit rating agencies and your credit score will go down. A low credit score will make it difficult for you to get a loan or credit card in future.
The second consequence of not repaying your loan is that the collateral that was pledged such as your house or car, will be taken by the financial institution and will be auctioned.
The financial institution will start sending notices to the borrower and these will have details about the loan amount, interest to be paid and how much money has not been paid. If you don’t reply to the notice or if the financial institution thinks that you are wilfully defaulting, the financial institution might initiate legal proceedings against you. However, if there is a guarantor for the loan, the lender will approach them and they will have to pay the loan amount.
Usually, the financial institution will start sending notices when you have missed one or two instalments of your loan. The legal proceedings usually are initiated only after the loan has not been repaid for many months or if you haven’t spoken to the financial insititution to explain your situation.
What to do?
In case you are unable to repay the loan, talk to the financial institution and see if your loan can be restructured. All borrowers will be given the opportunity to talk to the lender and explain their situation.
There are might situations such as ill-health, accidents or job loss because of which you are unable to repay the loan. In such cases, financial institutions will provide EMI holidays to the customer or their family. Guidelines by the Reserve Bank of India (RBI) says financial institutions should give reasonable time to the customer to pay back the loan and also forbids them from using ‘muscle power’ to recover loans.
Here are some options in case you are unable to repay your loan.
The first thing to do is ask your lender for an EMI holiday. If you think the situation will be alright in a few months, an EMI holiday can help you set your finances right. Financial institutions may allow you to take a holiday if you pay penalty or additional interest.
If a big EMI amount is the problem, ask your financial institution to reduce the EMI. The financial institution usually does this by increasing the loan tenure. Understand that lower EMI will mean more interest payment. Once your financial situation is alright, you can ask to increase the EMI amount.
You can ask the financial institutions to change terms and conditions of your loan. This could be a lower interest rate, reduction of charges, increasing the loan tenure, moratorium on interest payments or giving additional collateral. If you have assets such as a house or gold, you can consider giving it as additional collateral for reducing the EMI.
If the interest accrued is larger than the principal amount and you think repaying the loan might be very tough, you can ask the financial institution if you can repay a lower loan amount as a one-time settlement. You might have to prove that you don’t have enough assets to repay the loan. The financial institution might ask borrowers to repay the principal loan and might waive off the interest. If you go for a one-time settlement your credit report might get affected.
In case you have a high-interest rate loan, you can consider taking a low-interest loan to repay it. This is only if you think you can repay the loan with lower interest rate diligently. There are also credit counselling agencies that help you negotiate with the financial institution to settle the loans.