When you take a loan, you take a responsibility to repay it too. And it may happen that you may struggle to repay the loan. The reason for non-repayment could be many, ranging from loss of job and improper financial planning to poor health, disability or even demise of the borrower. In extreme cases, you could end up defaulting on your loan.
If you miss an EMI or two, you would get a reminder or a notice from the lender. Your credit score may be affected but if your problem is limited to only a couple of EMI, there is as much as you will be affected. You can gradually repair your credit score through good credit behaviour over the next few years.
However, if your cash crunch, for any reason, is not about to end soon and severely dents your ability to repay EMIs for a longer duration, you are looking at a much bigger problem. This will lead to a scenario where the bank will make aggressive attempts to recover money from you. This is unlikely to be a pleasant experience.
What does a loan default entail? How will a loan default affect your as a borrower? What should you do if you are facing a loan default? As a defaulter, do you have any rights? In this post, let’s try to answer such questions.
#1 Your Credit Score Will Take a Severe Hit
Clearly, your credit profile will be severely damaged. You may find it difficult to take a loan or a credit card in the future. If you feel the credit score is important only if you want to apply for a new loan or a credit card, you are wrong. Credit Score is assuming greater importance even beyond loans and credit cards. I had to submit my credit report to SEBI while submitting my application for Registered Investment Advisor. Don’t be surprised if you are asked to provide your latest credit report along with your job application. A poor credit score or report will go down as a negative and have an impact on your employment chances.
#2 Be Prepared for Harassment from Recovery Agents
This is more likely to happen in case of unsecured debt such as personal loans and credit cards. Since the bank does not have any security for these loans, it cannot auction anything to recover its dues. The lender may appoint a recovery agency to recover its dues from you. Even though RBI has clear guidelines about the recovery agents engaged by banks, I am not sure if the guidelines are followed well in practice. Do note even though unsecured loans are not backed by security, the loan is still given under an agreement. The lender can easily take you to court to recover its dues. However, since the judicial process is likely to be expensive and long drawn out, this is likely to be the last resort for them. If you had given a post-dated cheque for EMI payment, a cheque bounce also gives them an ability to file an FIR against you.
#3 Loan Guarantor Will Also Face Problems
If you sign up as a guarantor for a loan and the borrower defaults on the loan, the lender will also come after you. A loan guarantor is not just a nominal figure. Banks don’t ask for a guarantor for nothing. From the perspective of the bank, if the borrower does not pay, you have to pay. Liquidating assets (even if you have the asset as security) is a complex legal process and can be challenged by the owner on many grounds. Pressuring the guarantor to pay on the behalf of the borrower is a much quicker and simpler way. Therefore, think twice before signing up as a loan guarantor.
#4 Lender Can Attach and Sell Your Assets in Case of Secured Loans
This is typically the last resort. If you have defaulted on a secured loan such as a home loan or auto loan, the lender can repossess the asset and auction it to recover its dues. Any excess consideration received during the auction will be passed on to you. Please understand it is not so simple to auction the security. A due legal process has to be followed.
#5 Legal Heirs Won’t Be Spared Either
If the borrower passes away without repaying the debt, the lender can approach the legal heirs to repay the loan (in case there is no guarantor or the co-borrower). However, the liability of any legal heir can’t be more than their share of inheritance.
What Are Your Rights as a Loan Defaulter?
Even though you have defaulted on your loan, you are not a criminal. By the way, even criminals have rights. As a borrower, even if you have defaulted, the bank needs to give you ample notice before repossessing your property. If the loan account is classified as Non-performing asset (NPA), the lender needs to give you a 60-day notice to rectify the situation.
If you fail to repay in those 60 days, the bank can sell asset (security) by giving you another 30-day notice mentioning details of sale/auction. Such details may include fair value of the asset/property, reserve price, date and time of auction. If you do not agree with the fair value of the property/asset, you can contest it and find prospective buyers on your own (who may be willing to offer better price). Any balance proceeds from sale of assets (after squaring off the loan) will come to you.
Additionally, you deserve respect, even from the recovery agents. They can meet you only at the place of your choice. Of course, if you don’t specify, they will try to contact you at your residence or place of work. They can contact you only between 7 am and 7 pm. However, I am not sure if these guidelines are not followed by recovery agents or enforced by banks.
What Can You Do to Avoid Such a Scenario?
Don’t wait for the default to happen before you act. Typically, the debt problems do not surface out of the blue. Frankly, you will be the first person to realize that you are facing debt issues. And this will happen much before you actually default. Don’t ignore the signs. Take pro-active action. I have discussed many such steps in this post. I understand this is easier said than done. However, you must make an honest attempt to resolve the problem on your own.
If nothing works, you can approach the lender and try to explain your case. If your problem is genuine, they can offer you some concession. The concession may be in the form of deferral of payments for a few months, extension of loan tenure (that reduces the EMI), reduction in interest rates or a one-time settlement. Please understand that these concessions may have side-effects. For instance, the bank may impose penal charges. CIBIL score will be affected in any case. However, don’t expect the bank to go out of the way to make concessions for you. They will not write off the loan just because you seem like a nice guy. Moreover, this is only a temporary relief. Therefore, this approach is likely to work if your problem is temporary.
- Economic Times: Five rights of loan defaulters
- LiveMint: Keep these rules in mind while facing a recovery agent
Author’s Disclaimer — I am not a legal expert and have limited understanding of enforceability of contracts and legal rights of the lenders and the borrowers. You must consider the information shared in this light. If you find yourself in position where you might need to understand your legal rights as a borrower, you are advised to consult a lawyer. Relying solely on the information shared in this post could land you in trouble.