You are here: Home » Banking » Do You Think Defaulting on a Loan is All Right? Read Through and Think Again

Do You Think Defaulting on a Loan is All Right? Read Through and Think Again

As the first law in loan repayment says: “Thou Shall Not Default On Thy EMI.”

You may think it is perfectly alright to skip the repayment once or twice, after all many do that. However, it is more damaging to your financial life than you imagine.

While there is nothing wrong in taking a loan to buy a new vehicle or your dream home, you must see to it that you pay back your loan promptly as early as possible. There is nothing more irresponsible than defaulting on your EMI.

What are the Consequences of Defaulting an EMI?

Even for once, defaulting your EMI can turn to be highly damaging for your financial health. If you clearly understand these consequences you will never make the mistake of defaulting on your EMI.

Charges attached to the skipped EMI: The first effect is obviously the charges involved for defaulting on the repayment. The banks usually allow a grace period of 30 days for paying your EMI. If you do not repay within that period, then they will charge you 1% to 2% of your EMI as charges.

Apart from the loan provider, your bank can also turn to be the penalty imposer. If it is low balance in your bank account that has delayed the payment, you may have to pay extra charges for trying to overdraw. For every bounced post-dated cheque, the extra charges range somewhere between Rs. 250 and Rs. 400. In case you have opted for electronic clearing system to repay your loan, the charges will be around Rs.100 to Rs.150.

Bad Credit Rating: Most people might not be aware about this. Once you take a loan from a bank you are being evaluated by a rating agency called Credit Information Bureau (CIBIL). All banks furnish report to CIBIL about the identity of every borrower and their repayments. CIBIL then gives rating to each person so that, in future, banks can refer to it when deciding to sanction a loan to that individual.

If you default on your EMIs, your rating will fall. This hampers your prospects to get loan in future from any bank. This is a serious issue that most of us haven’t yet woken up to. Defaulting on your EMI becomes a blot on your credit worthiness for all time.

Increased Interest Rate: Once you miss one or more EMI, the bank has every right to raise the interest rate on the loan outstanding. This will burden you further. When you default your EMI you are giving the bank a message; your credit worthiness is poorer than they calculated. It means more risk for the bank and so higher interest rates.

Legal Action and Loss of Collateral: This is one thing that every one knows. People who default for a long time, knows that finally banks will resort to legal action to compensate their loss.

This could take a heavy toll on your financial life and an embarrassing situation to you personally. The banks would not find it hard to prove their point in courts, because you have signed all the documents before taking the loan. Actually, banks can take over your property with just a police complaint.

Should you really have to go through all this?

Third Party Recovery Agent: You can’t stand the stress of your bank calling you every other day reminding you about your repayment. So, how will you stand the stress and embarrassment when someone shows up in front of your house demanding you repay your loan? The banks begin to send third party recovery agents to your house to ‘talk’ to you on repaying the loan.

They may also visit your guarantor which will make things more complicated and embarrassing. It is clearly a tactic used by banks to intimidate you, but rather in a very formal and subtle way.

Steps to Make Things Right after You Defaulted on Your EMI

Now all you defaulters will be thinking just one thing, “Alright I didn’t pay the EMI. So now how can I get out of this mess?” The solution is easy if you are willing to do exactly as we say.

Resolve to Pay Your Outstanding Loan: First of all take a firm resolve to pay off your loans and postpone all other financial commitments and concentrate into repaying this loan.

Talk to Your Banker: Then do something that might not be so hard to do; talk to your Banker. If you stop being a rebel and start talking like a good boy then things could go a little easy on you. Banks are always willing to negotiate. All that the bank wants is you to start repaying your EMI without fail. They will look if your conditions are acceptable to them, and would most probably concede, if it doesn’t cost them much.

You can negotiate with them to lower the EMI and extend the number of times of repayment. You can ease your burden each month by doing so.

Pay Online: If you have defaulted on your EMI you can transfer funds from other banks online and repay your loans. There is a service called Bill Desk from Citibank to transfer funds from your other bank accounts.

ICICI bank has come up with ‘Click to Pay’ service on similar lines for its customers to pay defaulted EMI with funds from other bank accounts.

Promise yourself to Repay Future EMI on Time: If you want to get in to the good-book of your banker then be a model customer. Pay your future EMIs promptly and never default or delay your payment again. Remember, only fools will repeat a mistake twice.

Automate your account with standing orders so that at the start of every month a sum is transferred from your account and paid as loan repayment. If you are giving post-dated cheques, make sure that you have enough funds in your account prior to the date of maturity.

A disciplined life is the primary need to be financially sound. Always take care of your commitments and pay off your creditors as soon as possible. Otherwise it will be the reason for many a sleepless nights.

Buffer