What to do in case you can't pay your EMI or loan amount due

With the increasing availability of loans for every requirement, there has been a proportionate rise in the number of loan defaults too. The current scenario is grave, over 25 banks in India had to write off close to Rs. 1.14 lakh crore as bad loans between 2012-13 & 2014-15. This overwhelming sum of money clearly indicates that the economic situation for many borrowers in our country is worsening. Many people avail of loans thinking that they will be able to repay it easily, but their hopes are dashed when they suddenly lose jobs or find themselves facing an emergency situation which eats up the funds allocated for EMI payments. In such a situation, it might happen that well-meaning people are unable to re-pay and fall behind in their payments or in extreme cases may all together default. It is important here to understand that loan default is different from late payment of an EMI. A loan default is the complete failure to make the payment when it is due or the failure to repay the loan amount as per the pre-agreed terms. This article aims to help you understand the consequences when faced with such a situation, inform borrowers of their rights and the recommended way to resolve the situation.

Firstly, looking from a borrower’s perspective, a loan default will affect your credit score, your credibility will go down, taking loans in the future might also become difficult. Secondly, the financial institution is within rights to initiate legal action. Though, if you have been regular with EMIs in the past, the financial institution may take a more understanding approach. Though, in many cases you may not need to give up the asset in case of a loan default.

The best way to approach a default situation is to quickly take into confidence your lender. Most lenders will work with you to resolve the situation in an amicable and mutually beneficial manner. Based on the same, you can:

1. Reduce the amount of EMI: After considering your situation, if the lender feels that you have a regular cash inflow but the amount of EMI is troubling you, the lender will try to reschedule the debt by a subsequent increase in your loan tenure. This will bring an immediate relief in your situation but will also increase the amount of interest payments.

2. Defer loan payments: If your current situation is such that there will be no inflow of cash in the near future, you can ask the lender to defer loan payments. This is a temporary solution but the lender could impose penalty for the same.

3. Settlement: If the loan has been classified as a NPA (Non-Performing Asset), the lender would be open for one-time settlement which is an amount lesser than the original amount that is to be paid. This usually happens when the interest payable is larger than the amount of principle.

4. Loan Conversion: In case of an unsecured loan, the lender can convert the unsecured loan to a secured loan. This can be done by offering a security and it will reduce the burden of interest as well as EMI.
    

In case the above mentioned options do not work, a resolution could be decided on the type of asset.
 

1. Moveable asset:  In case of a moveable asset, the borrower will be given a notice to pay the outstanding dues, if the borrower does not pay the same, the lender will take possession of the asset. Once the lender has the asset, it will issue a pre-sale notice to the borrower and will ask him to pay the dues in a week’s time. If the borrower makes the payment, the asset shall be released and incase the borrower fails to make the payment, the lender will sell the asset through an auction within 90 days from the date of possession.

2. Immovable asset: In case of an immoveable asset, according to norms set, the loan maybe classified as an NPA. A notice about this is sent to the borrower. The borrower will be given additional time, usually 60 days, to make the payment. In case of non-payment, the lender shall ask for the possession of the mortgaged property and may auction it after a certain period of time of taking possession. In case, the borrower offers to pay the dues in full, the lender may hand over possession of the property to the borrower, but only if this offer is made before the auction. The excess amount, after the adjustment of dues shall be refunded to the borrower.
    

The borrower has the following rights in case of loan default:

1. Right to Notice: The borrower reserves the right to notice. Lenders cannot take any action against you without giving you appropriate notices.

2. Right to be heard: Once the borrower receives the notice, the loan defaulter can file a representation and raise objections against the re-possession / auction of the property.

3. Right to Fair Value: Along with the notice, the borrower has a right to receive a communication stating the fair value of the property to be auctioned. The borrower can raise objections if the property is being undervalued.

4. Right to Balance: With the appreciation in property, it may happen that there could be excess after adjustment of dues. The borrower reserves a right to receive the amount post the auction.

5. Right to be treated politely: The borrower deserves to be approached politely and the agent can only contact the borrower from 7 AM to 7 PM.

Similarly, lenders have rights that help them recover the amount of loan default. Both parties should treat each other with respect and also reserve the right to be heard. Thus, loan default though tough on both parties, can be resolved in a mutually respectful manner. Though as they say ‘prevention is better than cure’, thus, it is advisable to borrow only as much as you can re-pay comfortably and keep monitoring any change in circumstances so that no promises are broken and no conflicts arise.