Loan stating comes with heavy bolts of responsibility and fear of the consequences is a lot to put up with. This article touches on the topics of defining default, the consequences that would follow it, and how a borrower can get fair treatment from the financial institutions. Be it secured loans like a home equity or car loan, or an unsecured credit card, knowing the definition of default can keep your head over water and make things easier for you.

What Does it Mean to Default on a Loan?

Loan Default Explained

Defaulting on a loan means failing to make the payment comprising of the interest with the repayment amount on time. For instance, let’s say you borrowed a loan of 1000rs. But did not pay the required interest (100rs) on time. This would then put you on the defaulter’s list. Furthermore, Even if the payment option of default gets altered by paying the interest amount yet missing out on the principal value, you would still be put under the default category.

Most defaults arise when there are cash flow issues. Primarily, there is no money available on hand to cover your expenses, making it impossible to repay at the scheduled time. Both types of loans; secured and unsecured can go into defaults.

Secured Loans vs. Unsecured Loans

Secured Loans

A secured loan is a type of loan where funds have been borrowed against an asset that is a valuable commodity such as property, land, a vehicle, or even ornaments. If an individual fails to repay a secured loan, the lender has the right to take possession of the asset to retrieve the money owed. For instance, if you default on a mortgage, the financial institution will most likely sell your property to recover the amount you owe on the mortgage.

Unsecured Loans

Business loans and credit card debt are some examples of loans that are not secured by any form of collateral. Unsecured loans do not require an asset to have been placed against the loan for it to be granted. Upon defaulting an unsecured loan, a number of consequences may follow such as bureau reporting, loss of credit score, and have further measures taken against the borrower like elevated interest or referral to debt recovery services.

• The Consequences of Loan Defaults
• The Implications of Non-Payment

The most immediate consequence resulting from a disregarded loan tend to be an alteration to ones credit score. A valued claim of 750 easily drops to 600 upon defaulting. An alteration such as this is bound to affect the prospect of subsequent financial loans along with the dire consequence of severely elevated interest rates.

Increased Penalties and Interest Rates

When you default on one or more loans, different lenders may raise the interest rates on your available loans. This makes repayment a more strenuous task. Banks, as a precautionary measure, set much higher interest rates on your loans even before you have defaulted on them because they are afraid that you might default on multiple loans.

Loss of Collateral In Secured Loans

For secured loans, the lender is willing to recover the loan amount by auctioning the mortgaged asset. For instance, if the borrower has taken a loan of 1,000 RS and keeps something worth 2,000 RS as collateral, the bank will sell the collateral such that it covers the non payment of loan. Anything that remains after repayment will be given back to the borrower.

Rights As A Loan Defaulter

People who are faced with a situation concerning a loan defaulter should consult a legal expert because there are certain rights that ensure they are treated fairly.

Right To Plenty Of Notice

On being identified as a defaulter, the banking institution needs to issue sufficient notice period ranging from 60 to 90 days. During this time, the defaulter can make up any payments in order to avoid being labeled a defaulter by the institution. This is the law and having a notification outlining why you have been labeled as a defaulter is a basic requirement.

Right to Ensure Fair Value

For an asset pledged as collateral, there is a right to ensure that the asset is correctly valued. For example, if you have mortgaged gold worth Rs. 15 lakh and the bank claims it is only worth Rs. 10 lakh, you can contest the valuation. This guarantees that an appropriate value for the assets is paid.

Right to Realize Balance Proceeds

Any surplus balance remaining after the repayment of the loan is your right, and this includes all the funds that were generated after the selling of your collateral. As an example, if your collateral is sold at 15 lacs and your loan is 10 lacs, the 5 lacs additional amount must be given back to you.

Right to Be Heard

You have the right to make your case for why you defaulted on your loan. If you qualify as what is termed a “willful defaulter,” which means that you had no intention to default, you are allowed the opportunity to explain your situation to the authorities. This is particularly crucial when attempting to navigate a workout loan situation or seek out some form of loan restructuring options.

Claim to Proper Treatment

No one, even debt collectors, are allowed to intimidate or mistreat you. In the case that callers threaten to harass you, or in fact harass you, it is your prerogative to inform the Reserve Bank of India (RBI). You are also expected not to be coerced and threatened unduly in these circumstances.

How to Cope with a Loan Default Situation: Suggestions and Solutions

Loan Restructuring

If you are having difficulties paying back the entire loan value, consider the possibility of applying for loan restructuring. This means that you are able to set new terms on your loan further extending the term of payment and lowering the payment fee per month. This will help pay the debt easier.

CIBIL Score Customer Care

One of the most important results of a loan default situation is the effect it has on your credit score. Try to always pay back the entire CIBIL loan to shield your score. If it makes sense, rather do a loan restructuring than have your credit score suffer when settling for a lower amount. Definitely do not find yourself in a situation where you have to pay many settlements.

Conclusion

It is essential to know your rights and the options available to your when a loan goes into default. With both secured and unsecured loans, understanding how the situation can be mitigated will ensure there is minimal damage to your assets and your credit score. Make sure you speak to your lender, and remember to exercise your right to fair treatment. You can manage your financial circumstances better by taking appropriate measures.

You can easily eliminate all obstacles and get back to doing what is essential by staying up to date and utilizing tools such as loan restructuring. Remember, defaulting on your loan does not mean that you have run out of options. Stay informed and exercise your power.