Let’s start with a gold loan. If the borrower fails to pay back the borrowed sum, then the lending authority has full rights to sell off gold and encash the lost value. If the gold at stake has a price differential, then the same will be returned to the borrower (in case of a higher value of gold).
When a borrower fails to repay an EMI installment, then, as a result, the credit score gets hugely impacted. A negative impact on the credit score can be detrimental to how a lender views your profile. The credit rating companies maintain a track of all borrowers in the financial market. The lending institution sends the EMI records back to the credit rating agencies. Whenever a default takes place, the same is reported to the credit agencies and the credit score gets affected immediately. The cut takes place by a certain percentage. In turn, it impacts future borrowings as well. The credit score is accounted for whenever an individual approaches the financial institution for loans.
If the borrower has a history of defaults in the past, then the basis the credit score is a risk profile for the institution. A record of defaults is considered for high delinquency in future borrowings too. No lender would want a borrower becoming an NPA in times to come. However, the final decision remains with the credit lending institution to allow a high default case. But if such a borrower still gets a loan, then the rate of interest will be overcharged. This is different from the situation where the borrower has a decent credit score and payment history.
Most banks and NBFCs permit up to a 1-2 failed payments along with late payment fees. This is not so when the borrower does not pay in some months and over. The bank or financial institution sends a formal notice for representation. Here, the expectation is for the borrower to pay EMIs at the earliest. Whenever a borrower defaults over 90 days, the debt is struck off as NPA (Non-performing asset). However, an NPA is not as desirable for the prospective borrower, as it is a lockout situation for the future.
Major Consequences of non-repayment of loan are as follows:
Legal consequences & actions if the borrower fails to repay a loan:
If the borrower does not respond to the legal notices, then the bank/ financial institutions are bound to take legal recourse. Banks/ NBFCs start by sending legal notices to the borrowers for quick payments. The lending institution can also ask and direct at dissolving the collateral in case the borrower is not physically available or not reachable.
The Penalty can follow:
A few Banks/ NBFCs can turn to penalties for late-payments and defaults, especially in case of unsecured loans. Here, the lending institution does not have collateral to get the amount recovered. This penalty must be paid, after fair negotiation for the penalty.
Collateral is impacted:
The lender reaches the collateral as the last option. Whenever the borrower is unable to make repayments, even after the legal notices. The lender takes action by recovering the loan amount from the collateral.
Wherever the borrower transfers ownership rights to the lender, the lender can sell the property and recover the loan amount.
So it’s better to avoid defaults in loan repayments. It’s good to do what you’re supposed to do as a borrower.
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