Manage your Bank Loan Defaults the right way.
When one takes a loan from a financial institution like a bank, one is required to sign an agreement promising the lender to pay back the principal and the corresponding interest within the stipulated time frame as per the agreed schedule. A default occurs when one fails to make one or more of the scheduled payments. This is a violation of the loan covenant under the debt contract and is a matter of serious concern and must be avoided at all cost.
While we do not encourage anyone to default on their loan repayments, however, it is understandable that there can be cases when one is unable to (rather than unwilling to) pay the loan for a brief interim period. The unintentional defaults can be managed and negotiations can be made with the bank in a manner most beneficial to both parties.
There might be instances or unforeseen circumstance causing monetary difficulty. This loss of income however temporary might still take a heavy toll on one's financial planning and lead to a scenario where one cannot pay their dues.
Usually banks don't panic at the first missed payment and just impose a small fine and require you to pay the missed EMI along with the next and late fees. However, a couple of missed payments can prompt the bank to take action and force them to come looking on you.
However, in the event that things go so out of control that the bank hands over the debt to a collection agency, then ensure that the discussions from both sides don't cross civil boundaries.
- Don't abuse or respond in anger and if the collectors harass you, then escalate this with the bank ombudsman.
- Know your rights – as per RBI guidelines, recovery agents cannot harass you physically or mentally and the bank is directly responsible for any of their misdeeds.
As much as possible, it is advised that this be avoided. If expenses are foreseen, then call your banker in advance that you would be short of funds next month, and lending institution may be willing to work out a solution with you by reducing your EMIs, by increasing your loan tenure or by re-organising your payment schedule or even by letting you miss by levying a small fine on you. One can take an interest free loan from relatives or friends or in extreme cases, also evaluate refinancing the loan from a second bank at a lower interest rate.
The key here is to communicate with the bank and not to keep them in the dark. Getting on the wrong side of the banks is even more detrimental, if one has pledged collateral like gold jewellery, car or house against the loan, they can be re-possessed by the bank. This is something that you would definitely not want them to do.