Loan is the amount agreed to be paid by the financial institution or the lenders to the borrower with or without collateral security in lieu of the promise to pay back at the time of redemption of loan along with the interest. Before extending a loan to the borrower, lender do the credit health checkup of the borrower to be assured of the returns. This can be done either by the credit reference agencies or using personal systems. Generally, lender take combination of both ways in order to check the credit of the company. Even people with high credit rating also fail to repay the principal amount.
There are basically two consequences of not repaying the loan on time or fail to pay the loan:
- Credit rating agencies will register the borrower’s default which in turn, will reduce its credit score. Low credit score means your credit repayments are poor and unsatisfactory and it will make difficult for you to fetch the loan further.
- To use the security by the lender which was collateral security to the amount of loan and which says if the borrower fails to repay the loan then lender has the authority to sell that security ir use it for their own purpose.
There is a database of all card users and loan owners, which is sent to the CIBIL and credit card rating agencies. So firstly, credit score of the borrower is checked and then the loan is provided to the borrower. An application of borrower for the grant of loan is approved by the lender after checking its credit score, if that is found to be favourable then loan is sanctioned.
All the borrowers have this opportunity to approach the bank when they have difficulty in repayment of the loan amount and there is an opportunity for the borrower to restructure their debt to enable a smooth repayment as per their suitability.
There are some of the methods to which a lender can resort to receive the loan amount along with the interest.
- In the case of overdue of amount at the borrowers end then lender will send across a preliminary notice asking them to make the payment as soon as possible. If the banks found out that there is intentional delay by the borrower and lender can initiate legal proceedings against the borrower. A borrower is declared a Non Performing Asset (NPA) after defaulting for 90 days straight, something that potentially bars him from getting any loan in the future.
- If there is a guarantee agreement attached to the loan then lender has right to hold the collar of guarantor and get their balance sheet clear from him.
- There can be a situation of death, permanent disability, illness which breaks the flow of repayment instalments, in such a case bank will give justifiable holidays to the concern borrower family to make the payment. The Reserve Bank of India has issued a notification forbidding bank to use muscle power in order to make their loan amount recovered. Bank has to adhere to the code of conduct as laid down by the RBI in this case.
What rights do you have?
If you happen to be in the same muck, then there are some measures which can of great use for you. You can talk to your lender about it who can suggest ways of paying up the EMI on time. One of them is to reduce the EMI value by spreading it over a longer tenure.
Second option would be of loan refinancing (debt consolidation). This allows you to apply for another loan for the purpose of servicing all or a part of the previous loan. But make sure that the interest payouts along with the EMIs should be lower as compared to the original loan
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