When one takes a loan they do not think about defaulting on a loan unless one is planning on being a willful defaulter. After taking a loan the borrower may find themselves in an unenviable position where they may not be able to pay the loan EMIs due to some unforeseen circumstances, in such a scenario it is important for the borrower to know everything about loan default procedure, what he/she can deal with the situation, what are his/her rights in such a situation and so on. So here is everything that you should know about loan default.
The first thing to know is what does loan default mean. When the borrower fails to repay the loan installments as per the conditions set in the loan agreement it is known as loan default. This not only results in the borrower being put on a loan defaulter list but also results in levying of fines and interest due to late or missed payments. Banks declare an asset as an NPA when the borrower misses the installments for three consecutive months.
If the borrower anticipates some financial constraints in the near future then he/she should ideally be proactive and get in touch with the lender so that both can work out a solution. However if this does not happen then there are still options available to the borrower to try and get out of this situation. Here are a few things one can do:
Increase the Loan Tenure: If the borrower is finding it difficult to repay the dues to increase in the expenses or decrease in the income then they can request the bank to increase the loan tenure. Increasing the loan tenure will reduce the monthly installment burden however the overall interest cost will also increase. The lender may or may not agree to this option but most lenders are willing to offer a viable alternative in case of a genuine case.
EMI Holiday: This is relatively new and less explored option that may be offered by some lenders. Here the borrower is allowed a break from paying the EMIs for a period ranging from three to six months. This can allow the borrower some time to get his finances in order and then start repaying the dues.
Loan Conversion: This option can be used in case of unsecured loans; loans like an education or a personal loan are unsecured loans while those like an auto or home loan are secured loans as they have an asset backing them. Thus if you are defaulting on an unsecured loan you could convert it to a secured loan (provided the lender agrees to it). Lenders are more cautious about unsecured loans as they have no security net and the interest rates for these loans are also higher. Converting an unsecured loan to a secured loan will lower the EMI burden as well.
Balance Transfer of a Loan: When one opts for loan balance transfer the outstanding amount is transferred to a fresh loan. This fresh loan could be from the existing lender or a new lender. Here the unpaid principal amount is transferred to the new bank (or an existing bank with new loan agreement), the bank taking up the loan pays the due amount to the existing bank. The customer then continues to pay the new bank, EMIs at the new reduced rates. So this will make sense only if it eases your EMI burden due to a lower interest rate or a longer tenure or a moratorium in loan repayments.
It is important to remember that even if you default on a loan you have certain rights. The first thing is that before taking any action the lender has to give you sufficient notice and time so that you can repay your dues. In case the lender does initiate the process liquidate any asset they must inform the borrower of the fair value of the asset and the borrower also has the right to receiving the balance proceeds after the sale. Recovery agents hired by the bank also need to follow certain protocols, they need to respect the privacy of the borrower, they need to be civil with the loan defaulters, they cannot humiliate or threaten them or harass their family members.
In an ideal situation a loan default should not happen but if does then remember both the lender and the borrower need to follow certain guidelines to resolve the situation.