Defaulting on a loan will possibly make you stumble into a spiral of debt. To keep your credit score strong and your ability to avail credit in future, healthy, you must try to repay your loan at the earliest. However, sometimes, you may falter are repaying a loan due to a number of causes. The trick is to find a solution, which will help you not to default further in loan repayments.
The banks can restructure the loan based on your loan type. Simply extending the tenure of the loan will benefit you with smaller EMIs and therefore, managing it will become easier. There are number of ways to reduce the impact of defaulting on loan repayments.
Defaulting on Loan Repayment: What If My Loan Was a Secured One, Will I Lose the Asset/Property?
In most cases, the bank will look for possible solutions that will benefit both the parties if an only if the default made was due to some genuine reason. Thus, the borrower can retain his/her property, and on the other hand, the bank will avoid any changes made to its Non-Performing Asset portfolio. In cases like a job loss or an accident, the bank will consider this agreement and also check whether you paid your previous EMIs on time on not.
Options that Will Favor You While on Default:
- Rescheduling the Debt
The financial institution may extend your loan tenure if it feels that your current financial position is not good and you are having trouble with the EMI amount. However, it will lead to higher interest generation, but you will be relieved from your current situation. Furthermore, if you get into to the position where you think you can again pay the old EMI, a genuine negotiation with the bank may allow you to prepay the loan early. This will save you from the high-interest outgo if the bank does not charge you with any penalty.
- Deferring the Payment
If you can convince the financial institution of resuming the payments after a brief pause, then it may allow you to defer the loan repayment by few months. But, the bank/NBFC may charge you a penalty and pose a higher interest rate in some cases. However, it may help you still reduce the financial stress till you can arrange the finances to repay the loan in time.
- One-time Settlement
Loan settlement will allow you to make full payment of the principal loan amount, with reduced interest amount. However, loan settlement will badly impact your credit score. In case your financial condition is critical, you may require filing for bankruptcy to relieve yourself from further loan commitments.
- Making an Unsecured Loan a Secured One
In the case of unsecured loans, the banks act stricter, therefore; you can convert your unsecured loan into secured loan by offering an asset as collateral. By converting unsecured loan to secured one, you may gave the advantages of smaller EMIs and lower interest rate, thus lessening the financial stress. However, you still have to repay the loan; otherwise, the collateral in question will be utilized by the financial institute to recover the unpaid amount.
Or You Can Consider: Debt Consolidation
What Happens When None of the Above Mentioned Options Work?
In this case, the bank will march to the next step of repossession of assets.
Movable Assets (vehicles):
- The notice period of 7-15 days will be given to you by the bank to repay all the remaining dues and if not, it will recover it back from your vehicle.
- After the recovery, the bank will again provide you a seven-day pre-sale notice period to pay the outstanding dues. The pre-sale notice will possess all the details of contact person and the concerned office from where you can repay the dues and release the vehicle.
- If you tend to pay the dues with agreed terms of settlement, the bank will release you back the vehicle within one week after the payment.
- And if you failed to make the payment, your vehicle will be sold via auction within three months after the repossession.
Immovable Assets (property/land/house):
- Under u/s 13(2) of SARFAESI Act, you will get a notice from the bank. However, as per the guidelines set by RBI, this agreement is only applicable if the loan gets classified as NPA.
- You will be given a two-month period to either settle the loan or regularize the account.
- If you fail or refuse to pay, then the bank will provide you the demand possession notice asking for the physical possession of your mortgaged property.
- After the repossession, you will be given a one-month period to settle the loan. After that, your property will be sold by the bank via auction. The bank will send you the details about the auction referring to the date, time and venue.
- If you clear the dues in full, the bank might consider giving your property back to you after repossession and before processing the auction.
In case, your property fetches an amount more than that of the unpaid loan, the bank is liable to refund the remaining amount to you after adjusting the dues.
If you have defaulted at loan repayment, consider the mentioned guidelines to get out of the financial turmoil or you may land in a debt trap and other legal repercussions.