The Effects of Default on Loan Repayment

When a person applies for a personal loan from a bank, they are legally obligated to repay the
loan on time. Even if the borrower intends to repay the advance in full, it is possible that he or
she will be unable to do so.

Reasons for Loan Default
Loan default can occur for a variety of reasons, including,
1. loss of employment
2. Recession in the economy (in case of self employed)

Consequences of Default
According to Reserve Bank of India (RBI) regulation, banks consider a loan to be in default after 90 days of non payment from a borrower. i.e., after 90 days loan is classified as Non Performing Asset as per RBI guidelines.“In the event of a three-month failure to pay consecutive Equated Monthly Instalments (EMI), lenders have the right to send payment reminders.” In the event that payment is not made despite repeated reminders, the lender may begin the process of auctioning the property to recover the debt.

Some of the consequences of default are as follows:
1. In case of failure to repay loans and, if no satisfactory solution is found, the borrower
may face legal consequences in India.
2. There are two types of loans: secured and unsecured. In the case of a secured loan, the
security, such as a house or a vehicle, is confiscated or taken in lieu of the loan.
However, in the case of an unsecured loan, such as a personal loan, the person may be
placed on a loan defaulters list, which will reflect in the credit history, affecting the
person’s ability to purchase anything on credit and banks can file a civil or criminal
lawsuit against the borrower.
3. The person may also be charged with cheating under Section 420 of the Indian Penal Code, which carries a maximum sentence of seven years in prison and a fine.

Possible Solutions in case of Default
In case of genuine inability to pay the loan for particular period of time, due to loss of job etc,
there is a possibility of negotiation. Some solutions include but are not limited to,
1. Communication and Negotiation with the Lender
Explain the reasons for the default and the lender will bring out possible solutions.
• It can be an extension from the lender to make the repayment.
• restructuring personal loan by extending the loan term and lowering the EMI.
• In the worst-case scenario, a settlement from the bank.
2. Credit card usage should be stopped or reduced.In case of loss of work (unemployment) or if the employer reduces the salary, halting or reducing the use of credit cards for day-to-day expenditures. “Regular usage of credit cards with no income due to job loss or drop in income may result in an increase in credit card
outstanding month over month,”
3. Raise Funds by Disposing of Assets.
Underperforming investments should be liquidated to lessen the loan burden. In case nonperforming mutual funds or unit linked insurance plans (ULIPs) that consistently underperform benchmark indices, sell them and pay off the loan. When the loans have been outstanding for three years or longer, this is the best possible decision.
4. Defaulters Rights
There are certain rights given to a defaulter, whether he/she is a deliberate defaulter, or a
genuine defaulter. The RBI regulates banks and financial institutions. As part of their code of
commitment to their consumers, they are devoted to best practises. As a result, under the law,
banks or recovery agents assigned by banks are not permitted to threaten or abuse you.
5. Emergency Fund
The problem of default comes as a result of job loss or as other sources of money dry up.
Making a backup source that can be held in a savings account or in the form of fixed deposits
or Creating a contingency fund that includes at least three months’ worth of EMIs can thus
come in handy in uncertain times and prevent the person from defaulting altogether.