Many of us have taken loans to finance some of life’s major events: buying the family car, becoming home owners, marrying off a family member, or paying for a medical emergency.
Taking a loan helps us circumvent our lack of large sums of liquid cash. And, we pay back the loan with interest, in EMIs.
Sometimes, because of circumstances beyond our control, we are unable to repay our debts in a timely manner. Inability to repay a loan for a prolonged period leads to the deterioration of the relationship between the borrower and the lender. This is usually a bank or a Non-banking Financial Company (NBFC). Such a situation needs active management.
Money owed should be repaid eventually, but let’s take a look at your rights as a loan defaulter, and how you can set the situation right.
The Repercussion of Default
There are two major repercussions of failing to repay your debts.
The first one is that your Credit Score will take a beating. All credit-related information of loan owners and Credit Card users is sent to CIBIL and other credit rating agencies. They know your credit history, end to end. Every loan application today requires a reading of your Credit Score. Your application is approved only if your Credit Score is found favourable. If you default on your payments, your credit rating will go down. This will make taking loans in the future difficult, if not impossible.
Second, the property which was used as collateral for the loan can be repossessed and later auctioned by the lender after following due legal process.
You are Given the Benefit of the Doubt
All borrowers are provided the opportunity and have the right to approach the bank if there is any difficulty in repaying the instalments 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 wilfully 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 say 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.
Steps to Take
There must be 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 on 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 reduction of charges, lowering of interest rate, lengthening of the loan tenure, 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.
Getting Back to Financial Health
Analyse your situation and have a realistic estimate for when you can restart paying your loan. Treat this as priority. It is human tendency to start avoiding calls and messages from the bank. Do not do this. Inform the bank as soon as you can about any change in your circumstances that prevents you from paying them.
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 leeway.
If possible, try to get your friends and family to arrange for a few EMIs. This will give you some breathing space while you focus on finding a long-term solution to your financial problem.
Finally, control your expenses and prioritise between essential and non-essential spending. Minimize eating outside, going to the movies, making impulsive purchases, and other discretionary expenses. These little savings will add up to a bigger sum that will get you closer to repaying your debt.
Remember that repaying the bank to the full extent of your dues is not only your legal responsibility but also a moral obligation. You can seek ways of easing the situation temporarily but ensure that you finally clear all dues and not let your creditworthiness be harmed.