Personal loans are taken for multiple purposes; these are unsecured loans and are offered by financial institutions at high rates. Defaulting on any loan can impact the credit rating negatively. Any loan default involves paying late/missed payment charges and interest on the overdue amount as well. Below we look at the common causes of default on personal loans:
Personal loans are taken for miscellaneous purposes and unlike in the case of an auto or home loan there is no LTV ratio. The applicant can apply for a loan amount as per his/her choice and requirement and lenders sanction a loan based on the income levels of the applicant along with a few other factors. Lenders check debt to income ratio, credit reports and income statements before accepting the loan application. However there might be times when the borrower may still manage to borrow more than he/she can afford to repay as EMIs. Borrower may find it difficult to pay the installments due to a rise in expenditure or fall in income, whether expected or unexpected. Before applying for a loan assess your future inflow and outflow so that you borrow only the amount for which you are able to repay the EMIs.
Another common cause for default is lack of planning. If you have taken a loan or loans then you know what your EMI burden would be for each month so you must ensure that you manage your finances in such a way that the EMIs are not missed. Make sure that the basic payments and the installments are paid before you make any non-necessary or discretionary expenditure. In case at some point of time you feel that you will not be able to service a loan then it is better to get in touch with the lender. The lender may restructure the loan so that you find it easier to service the loan due to a bigger tenure and lower EMIs.
There might be times when a borrower defaults because of being irresponsible and forgetful. Lenders check the CIR before accepting a loan application, if there have been cases of default in the past then getting a personal loan for CIBIL defaulters will be difficult. However if there were no defaults in the past or one does manage to get a loan despite defaults then it is important that there are no further defaults. Defaults may happen if the borrower forgets to pay the dues on time or does not fund the account in time for the EMI to be deducted due to sheer negligence.
Defaults may also happen because the borrower has no intention of repaying the amount he/she has borrowed. Here it's not the inability of the borrower to repay the dues or forgetfulness that is the cause of default but the borrower has no desire of repaying the dues. Personal default cases hit the lenders the hardest as there is no asset as in the case of a home loan or auto loan which can be repossessed to recover the amount. Keeping this risk in mind personal loans are sanctioned at higher interest rates. It is important to mention here that any default whether willful or otherwise is reported to the credit rating agencies and impacts the credit rating of the individual thereby making it difficult to get a loan and in some cases even a job in the future.
Irrespective of the type of loan or one must always ensure that they borrow responsibly and follow the basic tenets of staying credit healthy. Going through your credit report once in a while keeps you updated about your credit health.