Loan is an amount provided to a borrower by a lender with or without any collateral, promising a repayment of the total amount including interest amount. We as individuals opt for a loan in the time of an emergency or in a dire need of money when no other source of income seems like a way out. Now in this whole process the lender (could be a bank or any financial institution) has the motive of earning through interest rate levied on the original principal amount, while you are trying to cover up a serious cash crunch so needs of two parties are fulfilled with a mutual agreement. Expenses do not arrive and knock before invading your life, the need could be as simple as a renovation of your home or as complex as a medical emergency. It could be your child’s education or their marriage, sometimes some expenses become too much to bear and necessary at the same time. At this point you are not left with a choice but to get a loan from a lender at an interest rate that can fit your pocket.
Now, if you have a regular income and proper cash flow each month through your salary or any other form of self-employment , it is easier to handle a cash crunch or a scheduled loan repayment but incase your financial situation is unstable and you are running behind on bills from all ends, then probably it is not good idea to opt for another loan as it will keep mounting on you like dark clouds on a rainy day! Let’s discuss some of the consequences that may occur if you fail to repay your loan.
When a borrower fails to pay back borrowed amount then a major consequence which occurs is that the credit score takes a hit. The lender (bank/financial institution) sends a repayment report to the Credit rating institution and on delay in payment the credit score comes down by a percentage. This will also have a negative impact on credibility of the borrower in regard to future borrowing capacity. With a negative past record, there is a high chance that other lenders might feel skeptical lending you anymore money and may back out stating this reason.
Banks usually allows one or two payments to get delayed or slip by and state them as late payments, but incase a borrower fails to pay back the amount on three occasions (consecutive months) then the bank will send a legal notice to the borrower under the Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act,2002(SARFAESI). This notice will have demands from the lender asking the borrower to clear the installments. If the borrower does not respond to the bank’s notices, then the bank is left with no choice but to take legal action or even ask the collateral to clear the debt.
In case the borrower has delayed payments lagging for too long then the bank or NBFC will levy a heavy penalty on late payment and defaults. There is an option for the borrower to negotiate the penalty amount, but it will stand as a compulsion regardless.
IMPACT ON COLLATERAL
When all fails from the lender’s end and there is no way the loan amount can be recovered from the borrower then collateral stands as the last resort for the lender. If the borrower has listed any property as their collateral, the ownership of the property will be passed on to the lender and eventually the lender can sell off the collateral to recover the amount.
Sometimes, the borrower has a justified reason for not being able to pay back the loan amount and is not trying to avoid it intentionally. Therefore, it is always advised to overview financial stability before opting for a loan. Incase a default or delay takes place due to any reason then certain steps can be taken by the borrower to avoid further penalties.
Reduction In EMI
One reason of untimely payments is the EMI amount. The borrower can request the lender to relax the EMI by increasing the tenure or reducing charges or interest rate.
The borrower can inform the bank of his/her inability to pay back the loan amount then there is a possibility that the bank may allow an EMI holiday for a few months, but in this case, penalties may be imposed on deferment.
The borrower in this case can take a new loan to repay the previous one. The borrower in this must make sure that the EMI to be paid on debt consolidation is lesser than the EMI of the previous loan. Although risky this option can be considered in case there is no other way out.
If the interest accrued is more than the principal amount, the lender will categorize this as a NPA (non-performing asset). This states that the borrower could be bankrupt and is not able to make any payments. In such a case the borrower is given an option to settle the loan by paying a smaller amount but eventually this will reflect in the borrower’s credit report that he/she was unable to pay back the loan taken.
So, we listed all the viable options you can go for if due to an unforeseen incident you as a borrower are falling behind the pay dates. We at credit Karo understand the needs of our customers and therefore we go the extra mile for you, making sure that you get your hands on the best deals in the market. We have ample amount of personal loan options which you can opt for without giving any collateral, we also have some amazing deals on home loans we would want you to check out, so what are you waiting for?
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