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5 Common Reasons Why People Default – A Series of Short Case Studies

  Saturday, Dec 17, 2016     written by : CSF-Team
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In the pre-credit scoring days, lenders often borne the brunt of defaults because people would take their debtors for granted. Even if a borrower was blacklisted by one lender, another unsuspecting lender was always available to lend. The poor lenders were at the receiving end, every time. Over time it was realised that all defaults are not intentional. Sometimes, life’s turbulent events rendered borrowers incapable of repaying their debt while at other times it was sheer ignorance.

Credit score models were introduced because lenders felt there was a need to study every borrower’s debt related past. Since then it has become easier for lenders to classify them into risk pockets and price them accordingly. Most people don’t even know that their actions are being tracked, recorded and rated. This ignorance costs them when they set out to seek credit in future. Let us take a look at a few cases where people did not repay their debts on time and what happened thereafter.

Following are the 5 common reasons for which people default despite having all intentions to pay and land themselves in loan defaulters list and look for personal loan for CIBIL defaulters to meet their fund requirements.

I – An Emergency Arises

Mandakini (34) had a flourishing career in advertising and was headed home one evening when her car met with an accident. With multiple fractures temporarily restraining her movement, she couldn’t go to work for several months. Owing to her stupendous performance, her company put her on an indefinite unpaid leave.

With no pay, surmounting medical bills and poor physical condition, Mandakini couldn’t pay off her credit card bills and car loan on time. Financial debts were put on the back burner. By the time she completely recovered from the mishap her pile of bills had inflated enormously.

At first she asked her card company to reverse the interest charged as it was not an intentional default. When the card company refused, she had the card closed. She contacted her bank and foreclosed her car loan at an amount she negotiated for with the bank as she refused to pay the penalties and late fees. As a result her CIBIL report stated “Settled” against the car loan.

Our suggestion:Often a medical emergency, an accident or a catastrophic event can lead to unplanned expenses and you may have to delay paying bills. Remember, you owe your lenders inspite of an emergency and your bills become due at the same time every month. One should always have an exigency fund should also buy adequate insurance to cover for such mishaps in life.

II – Spendthrift and Careless

Rahul was a carefree, jovial, “life-of-the-party” sort of person. He had a thriving career as a stand-up comedian. Unfortunately, there is no humour in missing payments. For some strange reason he was careless with his debts. He also assumed that lending institutions wouldn’t mind if he missed his payments by a few days. After all he was working with a top notch company and he was paying off though with lag.

Moreover, he had some very expensive habits and often indulged in unrestrained spending sprees. Coupled with being ignorant about how it will impact his credit standing had devastating effects on his credit score. Owing to a busy schedule, frequent travels and sheer carelessness added fuel to fire.

Soon Rahul was drowning under debt more than he could afford to repay. He decided to take a large personal loan to settle scores with other lenders. He couldn’t believe it that he was denied the loan despite his self-perceived status.

Our suggestion:It is myth that one’s status is akin to one’s eligibility for loans. Missed payments are treated equally for all borrowers. Being a senior member of an organization or owning an entity it is all the more important to be particular about one’s responsibility towards lenders and lead by example by becoming a conscientious borrower. Never miss any payment. Set reminders for payments and ECS Auto debit instructions on your account so that you are never late even if you are busy.

III – Over Leveraged with High Interest Debts

Like Rhea, most youngsters are becoming increasingly over-dependent on credit instruments. Rhea had quite a few credit cards. She even took two personal loans from two different banks – one to purchase jewellery and the other to fund her Europe tour. Soon she was feeling the pinch of EMIs. It was becoming so difficult to manage all her bills.

She couldn’t meet all her payments every month. So she began to rotate her payments by paying one loan in one month and the other in another month. Her balance never seemed to reduce as she was repeatedly missing either one loan payment or the other.

Our suggestion: It is important to understand the implications of your activity on your CIBIL score. Before taking a loan, one must understand the terms carefully, do the math on what will be the EMIs and how will they be repaid. Remember, loans are long term liabilities and they must be serviced continuously. Also, compare loans so that you can take advantage of better terms. Know that secured loans carry a lower rate of interest than unsecured loans.

IV – Retrenched or Failed Business Venture

Manpreet was working with a leading multinational bank when one fine afternoon he got a call from his senior who told him that his “services were no longer required by the bank”. This sudden news dashed Manpreet’s hopes and shattered his plans in a single stroke. He couldn’t come to terms with it but started working on his CV immediately. He applied to every job in sight but in vain. He remained unemployed for nearly the next six months. Finally, he took up a front desk job with a bank at another location.

All this while he was making ends meet with a shrinking pool of savings. The thought of repaying his debts hardly crossed his mind. On top of that, he mostly used his credit card and repaid only a minimum amount due every month. Manpreet didn’t want to but he had to default his payments. It took him over a year to get out of the debt trap he had fallen into.

Our suggestion:Losing a job can put you in a tight spot because of which you may not be able to meet your debt obligations in time. At such a time, keep a close watch on your expenses. Until you are once again gainfully employed, avoid using your credit cards. Block them or keep them away but don’t take more debt. Shift with a relative or a friend, use cheaper modes of transport, cut back costs to save money but don’t miss payments. When you make minimum payments, your rolled over balance is charged with interest and it rises exponentially, thrusting you further into debt.

V – Divorce or Death in Family

When Bobby and Priya parted ways, it left Priya broken to pieces. She decided to leave her past behind and move on. But leaving her share of debt obligations behind was not such a good idea. Soon she realised she had missed payments but because her alimony arrived late every month, she continuously made delayed payments.

Our suggestion: Sometimes life throws curve balls at us and it may knock us down senseless. It is important to always maintain your equanimity and think with your head over your shoulders. Don’t let your debt obligations take a back seat. If your financial arrangements change, ask your lender to change your ECS date. Like Priya should have changed her date to end of month by which she was sure her account would have enough balance.