What Happens When a Borrower Fails to Repay a Loan
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What Happens When a Borrower Fails to Repay a Loan

  • Highlights

  • Defaulting on loan repayment reduces the credit score

  • Bank reminders become a regular affair

  • Lender can take full possession of the collateral

  • Reduce EMIs, consider debt consolidation as remedial measures

A loan, extended by the lender (banks and other financial institutions) to the borrower, helps the latter meet his or her short term financial obligations in lieu of a promise to pay back the principal amount along with the interest at the end of the loan tenure. Primarily why a loan services both the borrower and the lender; the borrower gets a liquidity release and the lender gets to earn more on the principal amount.

With different loans for respective purposes now being offered by a host of financial houses, availing of one isn’t tiresome anymore. Moreover, EMIs have made it rather convenient for the borrower to pay back the total loan amount over a certain period of time in easy installments. However, the decision to take a loan from a financial institution warrants the need to have a steady cash flow as that will be the judge of your repaying capacity.

However, life is often unforgiving with the surprises it can throw at you. Bankruptcy, a major accident and other adversities can lead to an unanticipated cash crunch, throwing the borrower into a downward financial spiral. While chances are the lenders being unrelenting on the payment front with a number of measures at their disposal, it will help you to know your rights in such a situation and the probable consequences of failing to repay a loan.

Your credit score nosedives

Every lender sends records of the borrower’s repayment patterns to CIBIL and other credit rating institutions. Thus, erring or defaulting on EMI payment brings down your score by a certain percentage. The decision to grant a loan depends on the borrower’s credit score; a score on the lower side is equivalent to a risky profile, somebody whom the lender wouldn’t be pleased to help.

Moreover, if you are a serial defaulter, chances are a lender would start considering you a classic NPA. The whole episode surely won’t go down well with the bank and even if the borrower gets past with a loan, the interest rate charged will be much more as compared to the one imposed on a good credit profile with proper repayment history.

Reminders by banks become routine

Every lender usually allows a slip on one or a maximum of two repayments. But if the problem persists even after three consecutive months, the bank would send a notice to the borrower, urging him or her to pay up soon. A borrower is declared a Non Performing Asset (NPA) after defaulting for 90 days straight, something that potentially bars him from getting any loan in the future.

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Lender might resort to legal action

Not adhering to the reminders sets off a chain of events that usually starts with the bank taking to a legal notice issued to the borrower.

Can impose a penalty

In case of multiple loans, a lender can also impose penalty on the defaults and late payments. This usually applies to an unsecured loan where the lender doesn’t have any collateral as a guarantee against non-payment by the borrower.

Collateral gets affected

When push comes to shove for the lender, it can proceed to lay claim on the borrower’s collateral. While this is the last resort, banks can rightfully take possession of the collateral and auction it to recover the loan amount.

What rights do you have?

If you happen to find yourself in similar muck, know that there are redressal measures that can be of help. You can talk to your lender about it who can suggest ways of paying up the EMI on time. One trick is to reduce the EMI value by spreading it over a longer tenure.

You can also consider loan refinancing (debt consolidation) as another option. This allows you to apply for another loan for the purpose of servicing all or a part of the previous loan. But bear in mind that the interest payouts along with the EMIs should be lower as compared to the original loan.

With Bajaj Finserv’s pre-approved offers on a gamut of loans including personal loan, home loan and business loan, availing finance is a hassle-free affair. Know your pre-approved offer by sharing a few basic details.

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