5 Financial Consequences Of Defaulting On Your Loan. What Happens When You Default?

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You take a loan when you need it the most, but do not ever forget that when you borrow money from a lender, you make a promise to repay the loan. On time, every month. Because if you don’t, this will drastically reduce your credit score, impact your ability to obtain any future credit, and can lead to the seizure of personal property. Yes, there are consequences, and they can be severe! 

When you bounce a payment, first of all, your own bank will hit you with a cheque/ECS return charge. This will stay on your bank statement and any future lender who studies your bank statement will ask questions about it.

Next, your lender will call or message you alerting you of the missed payment, asking you to pay at the earliest. Typically you will have to pay late charges as well as bounce charges that vary from lender to lender. If for some reason, you do not make the payment, the lender will send their staff to collect and also understand the root cause of default. The lender will keep following up till the payments are back to current. If not, the account will move to the legal team for legal action.

So, what happens when you default? 

Let’s discuss at length how defaulting affects your financial health.

1. Always Overdue

Let us assume that your EMI is due for payment on the 10th of every month. Let us also assume that for some reason, you were unable to pay the EMI for January on time but you were able to pay after ten days. Which means that the January EMI was paid on the 20th. But now, how many days are left for the next EMI to fall due? Only 21 days instead of 31 days. This will put too much pressure on you to arrange for money so that the February EMI is paid on time. In all likelihood, you will miss the February due date as well and will face the same challenge for the next EMI in March. 

Therefore, delay in repayment of just one EMI can result in you always staying overdue.  

2. Negative impact on your credit score

Missed payments are reported to all the credit bureaus by banks and NBFCs. Whenever you apply for a loan in the future – for your personal use or for your business, the lender will check your track record. When you’re in default on any loan, your credit score will deteriorate significantly. While the score is downgraded immediately, it takes a very long time for the score to improve.

3. Future borrowing capacity is limited

Future lenders will reject your application after reviewing your credit history and noticing the unhealthy repayment behaviour. You will either not get any loans in the future or you may get it at a higher rate of interest. This especially hurts when you want to borrow for an emergency or for your family but are unable to borrow.

4. Lender can take your Collateral

In the case of secured loans, the lender has the right to take any collateral you give as security. For example, if you used your car for collateral, your lender can seize your vehicle. They can also take your property if it had been offered as security.

5. Legal action

Your lender has several legal options to recover the money. Cheque bounce is a criminal offense and can land you in prison. Additionally, the lender may use arbitration or SARFAESI to take possession of your property and auction it to recover the dues. If the sale of asset is not sufficient to repay the full amount, the lender can file additional suits to recover the shortfall/balance amount.

So, how do you ensure that you stay away from these challenges and enjoy a healthy credit score? Loans are given to you based on your repayment ability. Therefore, it is your responsibility to repay the loan in a timely manner. Ignoring this obligation could have an adverse impact on your credit score and financial situation. Be very careful while borrowing and ensure that you never borrow more than what you can pay back on time. On time repayment is as important as loan repayment so make sure that you never miss a payment. If for some reason you miss a payment, try repaying as quickly as possible, preferably within 24 hours. This will ensure a very healthy credit score and you can be assured that whenever you need money, all lenders would be keen to have you as their customer. 

 

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