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What happens when you default on loan payments?

  • Highlights

  • Defaulting on a secured loan can lead to repossession of the pledged asset

  • A default on an unsecured loan could lead to a higher interest

  • A student loan default leads to bad credit scores

  • 4 steps to rectify missed loan payments

Sometimes you may not be able to pay the required EMI and thus, end up defaulting on the loan you’ve taken. While some lenders offer flexible policy plans, most don’t and take action.

Once your payment date passes, your lender gets in touch with you via email or phone call to remind you of the same. If this is the first time you have missed a payment, you might be able to pay without incurring additional charges.

However, if a period of 120 days has passed since the default notice, the creditor will send a letter of demand claiming the full amount in payment.

How the nature of the loan affects default

Having insufficient funds to pay EMIs can happen to anyone. However, the consequences of such a failure often depends on the type of loan taken:

1. Secured loans

In case of secured loans like loans against property, home loans and car loans, the legal rights of the property or the car is handed over to the lender, in repeated cases of default. In case where assets like gold, shares/ other investments and insurance is pledged, the lender takes possession of these assets to sell them off at market value and recover their loss. Here, the lender has the right to sell the asset to recover their funds when you have too many defaults. However, before they do so, the financial institution is obligated to send notice to the borrower to pay off their debt in a specified time limit.

2. Unsecured loans

If you don’t pledge any asset or provide any guarantor, the loan is considered as unsecured. Defaulting on such loans could lead to the following scenarios:

- An increased interest rate: If you haven’t paid your EMIs, the lender will increase the interest rate and/or levy additional fees and charges on your loan.
- A lower CIBIL score: An EMI default would lead to the borrower’s credit score being lowered, which affects his future ability to take debt.
- Collection agencies: Some lenders turn to collection agencies to get back their money. These agencies could call you, write you letters or make a house visit.
- A lawsuit by the lender: Some lenders who don’t receive their money sue the defaulting borrowers. For the borrower, this could mean clearing off the outstanding along with paying for the legal fees and charges.

3. Student Loans

Student loans are often considered as high risk in terms of default, due to the nature of the loan. Students usually struggle to meet their payment right out of college, which ultimately leads to increased interest amounts and a bad credit score in the long run.

Rectifying the debt

If you do default on a loan, don’t worry. You can bring yourself out of that situation by taking the following steps:

1. Don’t panic: Defaulting a loan payment can be the source of stress and worry. Begin with calmly figuring out your expenditure and understanding how you were unable to make the payment. Then, figure out your next step rather than hide from the problem.
2. Communicate with the lender: Speaking with the lender can work wonders. Explain the reason for your loan default and work out a solution which benefits both of you. Some institutions are flexible with their policy terms, which can come in handy when you are negotiating for your repayment plan.
3. Consider refinancing: Refinancing gives you the ability to reduce your monthly EMI amount. However, most financial institutions will only consider individuals with good credit scores for refinancing.
4. Source additional income or cut back: Find ways to make additional income by taking up a short-term job, perhaps. If that isn’t a feasible option, try budgeting your monthly expenses to save more and pay off the additional debt.

With Bajaj Finserv’s pre-approved offers on home loans, business loans, and personal loans among others, you can skip the lengthy application process of availing finance and get money in bank with just 1-step verification. Find out more about pre-approved offers by sharing a few basic details.

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