What Happens When You Default on a Loan

7/28/2019 What Happens When You Default on a Loan

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What happens when you default on a loan?

Owning a house or a car is a dream come true for many because of the availability of loans. In the last fewyears with an increase in standard of living particularly in the metros, the once conservative and loan averse

investor is now willing take on loan commitments to satisfy even leisure requirements.

Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan

commitments, if you have lost your job or are entangled in a debt trap because of too manycommitments? Default becomes imminent. A default occurs when a customer repeatedly fails to make

payments to the lender as per the schedule outlined by the lender at the time of giving the loan.

Does a default mean that you need to give up ownership of the asset for which the loan was taken?

When you find that you are in a situation where you will not be able to meet your loan obligations, running

away from the lender is the last thing you should do. Banks/lending institutions understand that there could begenuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident

that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on

time, every time before events took an unfortunate turn.

You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and

case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefitbecause he will be able to retain his asset and the bank will also benefit because this agreement will prevent an

addition to its NPA portfolio.

The various options that can be worked out include:

Reschedule your debt: After having analyzed your financial position, if the bank feels thatthe quantum of EMI is what is troubling you, they may be willing to reschedule your debt by

extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean

more interest outgo in the long term. However, you should consider the immediate relief it can bringto your current situation. When the tide turns and you are facing better times you can try negotiating

with your bank and revert to your old or higher EMI or even prepay your loan, closing it early andsaving excessive interest outgo if it makes sense post the pre-payment penalty.

Deferring the payment: If your financial situation is such that there is likely to be a jump

in cash flow going forward because of change in job or any other reason, you may seek temporary

relief from the bank for a few months. The bank may permit the same but may charge penalty for notpaying within the time frames agreed upon earlier.


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Restructuring the loan: In case of housing loans, banks have a provision forrestructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank mustperceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines

on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases.Foreclosure by selling the collaterals with the borrower's co-operation is also advised as the next step.

One time settlement: If you express your desire to pay back, and make known to thebank your current financial condition, banks may be willing to enter into a one time settlement on a

case to case basis. This is a good way to get rid of your loan if you have some money as usually the

settlement will be done at a lesser value i.e. the bank may waive off some amount/charges. If yourfinancial situation is really bad, then you may need to file for bankruptcy to free yourself from the

loan commitment.

Conversion of loan in case of unsecured loans: Banks tend to be stricter as far asunsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured

one by offering a security. That should bring down the rate of interest and thus the EMI burden.

Running away from the problem is not the solution. Not only will you undergo emotional stress, you will alsoend up losing your asset. What is important is that your intent to pay off the loan should be evident to the

lender. It is in the banks interest too, to ensure that the loan doesnt turn bad. So be wise and engage in adialogue with the bank the moment you figure out that you will not be able to meet obligations and dont wait

till the last moment. That should help you tide over the temporary crisis you could find yourself in.

What happens if none of the above options work out?

If none of the above options work, the bank after giving you time for repayment will go in for repossession of

the asset for the purpose of recovery of dues.

Movable asset (Car/Auto)

Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. Incase of non payment within this notice period, the Bank will repossess the pledged vehicle..

After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a timeline of 7 days to make payment of the outstanding dues. The Pre Sale Notice would clearly mentionthe details of the concerned office and the corresponding contact person for payment and release of

vehicle.

In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehiclewill be released back to the borrower within 7 days from the realization of the payment.

The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 daysfrom the date of repossession.


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Immovable Asset (House/property/land)

A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is

classified as NPA as per the guidelines set by RBI

The customer will be allowed 60 days post issuance of the notice to regularize the account orcome forward to settle the account. .

If the borrower refuses to pay, then the authorized officer will ask for the physical possessionof the mortgaged property by handing over the demand possession notice to the borrower

The Bank shall proceed with the auction of the attached property post 30 days of taking possession ofthe property, in the event, that the customer does not come forward and settle the loan. The Bank shall

send the customer a letter intimating him, of the venue of the sale indicating date and time of the

same.

The bank will consider handing over possession of property to the borrower any time afterrepossession and before concluding sale transaction of the property, provided the bank dues are

cleared in full.

Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

Borrower's rights

The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank

in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT

passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days

of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was

wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate

compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of yourassets, but your credit score too will take a beating. Even rescheduling debt tarnishes your credit

history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an

issue which is a huge financial setback. Make sure you take a loan only if youre sure of timely

repayment. A good way to do this is to ascertain your personal net worth in terms of assets you ownand the money you have at your disposal after taking stock of your existing debts and other financial

commitments.

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What Happens When You Default on a Loan