We occasionally find ourselves unable to make loan EMI payments. Loss of consistent income or an unexpected sickness might be the cause. Loans put people in financial trouble, just as high levels of long-term debt do for businesses.
The most favoured characteristic of a bank has traditionally been its capacity to sanction loans. Customers can get personal loans from payment banks and NBFCs without having to put up any security. Unfortunately, the ease of obtaining a loan has increased the amount of defaulted payments. Your credit score suffers greatly when you have a loss of employment, medical procedures, or bad money management.
Borrowers that don’t repay debts in accordance with the original agreement are in default. This implies that several payments have been skipped over the course of several weeks or months in the case of the majority of consumer loans. Luckily, lenders and loan servicers frequently give borrowers a grace period before taking action against them. The term “delinquency” refers to the interval between a missed loan payment and the debt default. Prior to default or being generally classified as a Non-Performing Asset, the delinquency period allows the debtor the opportunity to contact their loan servicer or make up any missing payments.
Why do we Default?
The majority of the time, payment defaults is momentary in nature. It can be due to a job loss, a little extra expense that prevented you from paying your EMI, or a protracted sickness that put you through financial hardship and required several months in the hospital.
Very rarely, persons default due to a persistent disability or the untimely death of a person who was not insured or who left their family with insufficient means. In these exceptional circumstances, we are unable to intervene much.
But we can definitely handle the urgent cases extremely effectively. Most individuals react in fear and make matters worse.
How do we proceed?
Informing your creditor or bank about the short-term issue you are experiencing is the first and most important step to do. Talk with the banker and come up with a plan that you both agree on. Never run away from the banker or avoid their calls. Do not forget the debt you owe the bank.
Likewise, consider different choices. Is it conceivable to shorten the term and raise the EMI to lower your outlay? On this front, banks typically exhibit flexibility.
If you have a high interest rate, check into other choices including refinancing the loan with a different bank, negotiating with your bank to lower the interest rate, or paying it off with cheaper funds. Your friends or family may be able to lend you money at a lower rate.
Reduce your spending lastly. You will benefit much from taking this one step, both in terms of solving current issue and ensuring your financial stability in the future.
Effects of Loan Defaults
1. Impact on credit score- Every time a person misses an EMI payment, their credit score is negatively impacted, which limits their ability to borrow money in the future.
2. Penalties – If a borrower makes late payments, which constitute a payment default, the lender may assess a penalty fee on the offending party.
3. Legal Recourse – Section 138: The lender will always have legal options accessible to them within the bounds of the law. The filing of a complaint under Section 138 of the IPC may result from payment failures indicated by the bouncing of a payment instrument.
4. Seizure of Collateral or Property – SARFAESI – In the instance of Secured Loans, the Lender chooses the option to take the Collateral under the SARFAESI Act after giving the Borrower Adequate Notice and Time to Repay the Loan Amount. Then, in order to recoup debt, such repossessed properties are auctioned.
How do you handle it?
1. Adjust the EMI and Loan Term
This option is better suited when there has been a partial loss of income or when the borrower is having trouble making EMI payments. It can be the result of unexpectedly high abrupt costs or a medical emergency. It is wise to visit the bank in these situations and ask them to reduce the EMI and lengthen the repayment period. The bank may take into account a borrower’s request if their prior repayment history has been favourable. To prevent a bank loan default, the bank will lower the EMI.
2. Limit your Spending
Although it’s a hard fact to accept, reduce your spending at this time. Reduce unnecessary spending or replace it with less expensive options! It is not advisable to carry on in this manner until the unpaid dues are paid. Start developing the budgeting and expense-tracking habits to find wasteful spending.
A minimalist lifestyle is a terrific approach to cut back on unnecessary spending in your daily life. Limit your excesses, use local or off-brand items, or try dining out less frequently. Self-control training will eventually have a favourable impact on how you handle your own finances.
3. Refinance the Loan
This choice isn’t well known by many debtors. This is among the finest options for avoiding bank loan default. In the event of a credit card payment default, it is the more preferable alternative. Refinancing the outstanding balance results in the conversion to a personal loan with more stringent conditions. It is generally good to investigate option 0 when dealing with other debts before thinking about refinancing the same. If you have a house loan, you can choose to transfer the amount to a new lender instead of having the previous lender handle the refinancing.
4. Use Bonuses and Salary Increments
Any upcoming raises in earnings or bonuses can be put toward paying down existing debt. Instead than succumbing to irrational impulses, pay off your loan with the extra money. Having said that, speed up the repayment process by paying off the loan with additional funds, such as a windfall.
No matter how well-managed your money may be, it’s crucial to plan ahead for such circumstances. Your budget’s delicate balance may be upset by certain unforeseen financial commitments, which might also harm your credit score. Additionally, defaulting on debts will have legal repercussions.
5. Restructuring of Loans
Try to renegotiate the loan conditions by seeking restructuring after notifying the lender of the default. Request a longer loan term, smaller monthly instalments, or try to negotiate a lower interest rate for more manageable repayments.
6. Loans against Assets
Few individuals are aware that they may get loans against their current assets. If a borrower is confident that he will be able to handle his financial difficulty within a few months, then he should use this choice. If a borrower loses their job but is certain to find employment within a few months, for instance. To avoid a domino effect, a new loan must be taken out to pay off the old one. Here are a few possibilities to think about:
- Overdraft facility from your existing Savings account
- Loan against Credit Card (Max 30% of Credit Card Limit). It should be least preferred.
- Loan against Fixed Deposits
- Gold Loan
- Loan against Insurance Policy
- Loan against PPF account
- Loan against securities
- Loan against property
7. Option for Deferred Payment
Ask your bank for a delayed payment option while looking for strategies to cope with loan defaults. In this case, the bank will temporarily suspend the interest rate to give you time to recover from a financial setback. Use this time as a buffer to wisely save more money and pay back the debt
8. Employer Loans or Salary Advances
Borrowers always have the option of approaching their employer in the event that bank loan default results from a cause other than job loss. The majority of businesses have employee-friendly policies that offer loans with low interest rates—typically 2 percent. A wage advance is also offered by some employers. The current leave balance may also be cashed in by the borrower. Some businesses also provide EMI holidays to help employees.