What To Do Next If You Default At Loan Repayments
Defaulting a loan can bring serious damage to your credit and adversely affect your loan eligibility in the future. If it is a secured loan, you may lose the asset if non-payment occurs for a continuous period. Therefore, it is important to repay your loan on time in order to keep your credit score strong, protect your asset and avoid a financial turmoil.
From medical emergencies to job losses, there are many situations in life that could strain your finance and make you falter at repaying a loan. A default can occur instantly after you miss a payment or after a few days or months. It depends on the loan type, lender and the specific term agreement which both parties have agreed upon.
Whatever be the situation, it’s always the best to avoid the occurrence of a default in loan repayment. Being informed about the possible solutions helps you handle the worst-case scenarios efficiently and manage a healthy credit score. Listed below are a few strategies to help you if you find yourself defaulting at loan repayment.
Communicate to the lender
If you have trouble making a payment, speak about it to your lender as soon as possible. It opens up the possibility of reaching an agreement on a favourable solution to avoid default. Mostly, the lender or the financial institution will look for possible solutions to help the borrower if the non-payment occurs due to a genuine reason.
Perhaps, the lender may lower your repayment amount or adjust your loan term or take any other step to help you in repayment. In case of any arrangements made, make sure you document the communication and the solution derived.
Reschedule the debt
Debt restructuring is another possible solution to avoid the defaulter tag. If you are facing a temporary financial crisis, you can request your lender to restructure the loan and extend the tenure. This could give you temporary relief from the current financial crisis.
However, the interest payout may increase according to the extended tenure. In addition, the bank may penalise for the rescheduling of the loan or for the delaying of the EMIs.
Furthermore, if your financial condition gets back on track later, you can negotiate with the lender to repay as before. Thus, you can decrease the interest rate later in case the financial institution does not levy penalty for the restructure.
As you might be aware, an unsecured loan does not have any collateral attached to it whereas secured loans have attachments. If you are availing an unsecured loan, your lender might act stricter. If you find it difficult to pay the EMI of an unsecured loan, you can request the lender to change it to a secured loan by giving an asset as collateral. By choosing a secured loan, you will enjoy lower interest rates and lesser EMI.
Although it decreases the financial strain temporarily, a secured loan creates a higher risk of loan repayment in the future. The bank may seize the asset which is put as collateral to recover the unpaid money.
Defer the payment
In case you are sure of being in a better financial situation in a brief period of time, you may ask the lender to defer the payment for a few months. In most cases, financial institutions agree to defer payment for a short term. But you might have to pay penalty for non-payment of the loan within the predetermined period.
Ask for a one-time settlement
Loan settlement gives you the option to pay the principal amount with less interest amount, provided the bank is convinced about your financial crisis. Although loan settlement has a negative impact on your credit score, ‘settled’ status is better than an ‘unpaid’ status.
If you have the required money to pay back the principal loan amount, then you can opt for a one-time settlement and get rid of the debt. However, financial institutions have the final say in this option.
This option lets you avail a personal loan to pay off a number of loans. By taking a single loan, you can close a group of smaller loans and avoid negative credit ratings. It is different from debt settlement. Moreover, you can save on interest outgo of multiple loans and focus on a single EMI.
If nothing of the above-mentioned methods work for you, the lender may take appropriate action as per the bank loan recovery rules. Subsequently, you may face the legal repercussions and land in a debt trap. Moreover, default affects your ability to enter into credit contracts in the future. Hence, communicate with your lender, resolve the default in the best way possible and take your road to financial wellness.