Gone are the days when borrowers went scot free after defaulting on Bank Loan. In the digital age, it is very easy for banks to locate bank loan defaulter. In particular cases, i have seen banks filing FIR if the defaulter is wilful defaulter with an intention to fraud and amount is huge. I am not scaring the readers but to give a realistic picture. The things will go bad from here on as there is an enormous pressure on banks to recover the dues and bring NPA’s under control. The default on a bank loan is not an overnight phenomenon. A borrower receives initial signals of financial distress. The few exceptions are a sudden job loss or medical emergency. It is imperative to bring things under control as soon as borrower get the first sign of financial distress.
The problem aggregates if the borrower ignores the danger signals. I observed that in the majority of the cases, the situation can be brought under control. In few cases, due to multiple bank loan a panic situation is created. A borrower is clueless what to do next. In my previous post, i discussed how to avoid loan default or such situations. The best way to handle the situation is to prioritize loans. The bank loan with highest interest rate & low value like personal loan, gold loan, etc. should be handled on priority followed by the Home Loan, etc. Secondly, the borrower should evaluate the situation before taking further steps. For example, whether there is a complete loss of income or partial loss. The probability of getting a job in near future, contingency funds and Plan B. As each case is different from each other therefore there cannot be standard process on how to handle the situation. In this post, i will list down various options that can be exercised by a borrower to handle default on the bank loan.
The next big question in front of borrowers is how much time they have to handle the situation before it goes out of control. Normally, it is Three months for loans like Home Loan. Under SARFAESI Act, bank wait till Three months to declare an asset NPA. Whereas for low-value loans, banks are willing to give max 1-2 months to streamline payment. In the case of financial distress, it is too short duration but unfortunately, there is no other option for buyers. Let’s check how the borrowers can manage default on the bank loan.
Default on Bank Loan – How to Manage it?
1. Tweak the EMI and Loan Tenure: This option is more suitable in case of partial loss of income or borrower is finding it difficult to pay the EMI. It may be due to sudden unforeseen expenses or medical emergency. In such cases, it is advisable to approach the bank and request them to lower the EMI and increase the tenure. If the past repayment record is good, then the bank may consider the request of a borrower. Bank will reduce the EMI to avoid default on the bank loan.
2. Refinance the loan: Not many borrowers are aware of this option. This is one of the best choices to prevent bank loan default. It is more preferred option in the case of a credit card payment default. The outstanding amount is refinanced and converted to a personal loan with stricter terms. In the case of other loans, it is always advisable to explore option no one before considering a refinancing of the same. The refinancing can be done by existing lender or in the case of home loan you may opt for a balance transfer to a new lender. It is advisable to stick with an existing lender but in case existing lender is adamant then you may transfer to the new lender on more favorable terms. You should also discuss with the bank, the impact of refinancing on your CIBIL Score. In the case of refinancing by existing lender, it may be reported as restructured loan in CIBIL. On the other, refinancing by the new lender is beneficial for borrower as it will be reported as a new loan to CIBIL.
3. EMI Holiday: A relatively new concept and not many borrowers are aware of it. If your lender provides a facility of EMI holiday, then you should avail the same. Under this facility, a borrower is exempted from EMI payment for Three to Six months. It will give a breather to the borrower to manage his finances and manage bank loan default. Again this option cannot be taken for granted and is at the sole discretion of the bank. It depends on the past repayment track record of the borrower.
4.Loan against assets: Not many people are aware that they can avail loan against existing assets. This option should be exercised if a borrower is sure that he will control the financial distress in few months. For example, in the case of job loss, if a borrower is sure to get a job in a couple of months. Otherwise, a new loan to clear the existing one will create a chain reaction. Some of the options that can be considered are
- Overdraft facility from your existing Savings account (Depending on Account History)
- Loan against Credit Card (Max 30% of Credit Card Limit). It should be least preferred.
- Loan against Fixed Deposits
- Gold Loan
- Loan against Insurance Policy
- Loan against PPF account
- Loan against securities
- Loan against property
5. Loan from employer/Advance against Salary: In case bank loan default is due to a reason other than job loss than a borrower can always approach his/her employer. Most of the organizations have employee friendly policy to provide a loan at lower interest rate generally 2%. Some of the employers also provide an advance against salary. A borrower can also en-cash the current leave balance. Some of the organizations also offer EMI holiday to comfort the employee.
6. Liquidate existing assets and savings: Though it is a sensitive issue and i am very sorry to suggest this. It should be the last option. If a borrower explored all the possible options and nothing works out then, the only solution is to liquidate existing assets and savings. The reason being, you are paying interest/penalty on the outstanding amount, and it will increase exponentially due to the compounding effect. The situation is worsening in the case of credit card dues as the rate of interest is up to 40%.
Words of Wisdom: A bank loan default is a very tough situation to handle but if you lose confidence and courage then things may worsen. You should always be forward looking as you cannot change past or present. You can always change what you want to do next. Such situations always teach a positive lesson for future and make a borrower financially wiser. Therefore, the intent should be to face such situations and overcome. Trust me after you come out of such circumstances, your family will be proud of you. I always pray that God should never put anyone of us in such situations.
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