Not many people understand the importance of repaying loans taken from banks or NBFC. It is the main responsibility of the borrower to make repayment on time. Any failure to do this can impact your credit score and damage your ability to take future loans.
No doubt, loan defaulting triggers fear in the borrower. But note that loan defaulters also have some rights. The bank cannot indulge in arm-twisting of defaulters in any case.
Protection for defaulters
- The need for protection
Since there may be an authentic reason for default of the loan, the lender may offer options to help the defaulter repay. However, even if the situation is to be resolved in court, genuine reasons are given much weightage. In case a person is unable to pay personal loan EMI, this does not make him/her a criminal.
- No Jail sentences
Loan default is a civil dispute. Any case of loan default cannot be presented with criminal charges. This implies that the police cannot arrest a defaulter. Therefore, a person with a genuine reason for default of a loan should not give up all hope. He or she can negotiate with the lender according to certain rules.
Warning signs
To avoid damage to your reputation and finances, keep an eye out for the following warning signs and actions that occur if you default on your loans:
- Notification from lender
The lender may send you a notification when you miss the first or second month of payment. Some lenders may send an agent to your residence or a message to your registered contact number requesting you to make payments. If you do not respond, some lenders might issue a notice, or may even send post-dated cheques.
- Negotiate with lender
In the event of a loan default, ensure you approach the lender for a solution. In case you have genuine reasons for loan default, such as unpredictable and unavoidable situations, your lender might comprehend your problem and ease your burden by halting EMI payments or reducing the EMIs.
- Submission of post-dated cheques
The bank may issue post-dated cheques from your account. Do not ignore notices regarding post-dated cheques sent by your lender. Ensure that your account has enough deposits for the passing through of such cheques. In case your cheque bounces, then as per RBI guidelines, you will face criminal charges.
Legal consequences
You may face the following legal consequences if you default on loans:
- You may face punishment for personal loan default. You will be booked under Section 420 of the Indian Penal Code that involves imprisonment. While most default cases are settled in the Civil court, certain actions may invite criminal proceedings
- Your name will be included in the list of loan defaulters. This will seriously damage your credit score and reduce your chance of getting a loan in the future
To avoid such consequences, it is always good to have an emergency fund to come to your rescue. You can even negotiate with the lender about totally closing the loan in exchange for prepayment if you have an asset that can be sold or funds that can pay for this. This will help keep your EMIs as low as possible, permitting you to make payments even during emergencies.
Steps to Help Genuine Loan Defaulters
Loan defaulters can be classified into 2 categories: Criminal defaulters and Genuine defaulters. The former defaults on purpose, while the latter has genuine reasons for not being able to pay back loans.
Generally, banks do everything within rules to help a genuine loan defaulter. It is also in their own interest to get rid of NPA’s (Non-Performing Assets). So, a genuine defaulter must approach the bank and explain his situation.
The Banks will do the following things:
- Reduce the EMI
They do this in either of 2 ways: Increasing the tenure of loans and converting unsecured loans into secured loans.
- Allow free period for EMI/Offer Moratoriums
This offers temporary relief to borrowers, and they can resume paying EMI’s after a free period (like 3 to 6 months).
- Settle for a haircut
When the loan defaulter simply cannot payback the amount, he may offer the bank a small amount of repayment and request the bank for closure of the loan. The onus is on the borrower to convince the bank. The bank prefers to get something instead of nothing.
Treatment of Wilful Defaulters
One of the ways banks and lenders try to recover the loan amount is by assigning loan recovery agents
This measure is undertaken for wilful and malicious defaulters of loans. Banks use recovery agents to force defaulters to come to negotiate with them. But RBI cautions the following guidelines: Banks must perform due diligence while hiring a recovery agent, like doing police checks. Before sending recovery agents, the bank must offer prior intimation. Banks must hear the side of the defaulter’s story sans any bias.
In sum, these are some of the legal implications regarding loan defaults.
Related Article to Know More: What Happens if the Borrower Fails to Repay the Loan
