What happens when you default on 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 any 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 total amount in payment.

How the nature of the loan affects the default

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

1. Secured loans

In the 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. If assets like gold, shares/ other investments and insurance are 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 notify the borrower to pay off their debt within a specified time limit.

2. Unsecured loans

If you don’t pledge any asset or provide any guarantor, the loan is considered 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 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. This could mean clearing off the outstanding and paying for the legal fees and charges for the borrower.

3. Student loans

Student loans are often considered 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 cause 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 that benefits both of you. Some institutions are flexible with their policy terms, which can come in handy when negotiating 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 an 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.

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