While access to loans has become easy, taking a loan should be a well-thought out decision, as it involves financial commitment on your part to repay the principal along with interest applicable.

At times, unforeseen circumstances such as job loss or medical emergency may lead to loan defaults. Though completely unadvised, in case you default on a loan, here’s what you should know.

Does loan default differ from insolvency, illiquidity and bankruptcy?

They may sound similar; all these terms have different meanings. Insolvency implies that the debtor (borrower) is unable to repay the debt. Illiquidity implies that the debtor has insufficient cash or other liquefiable assets to repay the debt. And, bankruptcy occur when legal findings lead to imposition of court’s supervision over the financial affairs of the insolvent or those who defaulted.

Additionally, the RBI, in 2015, clearly defined the definition of another term, I.e. willful default, which is deemed to occur in the following incidents:

Failure to repay even when the borrower had the capacity to honour the obligations

Diversion of the loan’s funds for some other purpose rather than using them for the reason specified to lender.

Borrower has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds, i.e. utilisation of funds for purposes unrelated to borrower’s operations, thereby resulting in funds not being utilised for the specific purpose for which loan was given, nor are the funds available with the unit in the form of other assets.

The borrower has defaulted repayment and has also disposed of/removed the movable fixed assets or immovable property given for the purpose of securing the term loan without the knowledge of the lender.

Does loan default affect credit score?

Loan default has a negative impact on your credit score. Any form of default on your loans and even your credit card bill gets reflected in your credit history. Credit bureaus lower your credit score when you miss or delay payments or default on your loans, thereby decreasing your creditworthiness. Moreover, since you failed to repay the loan, whether it’s due to financial exigency or it’s a case of willful default, your future chances of loan approval drop considerably.

Rights of loan defaulter

Right to ample notice: Every loan defaulter has the right to be given a notice period to repay the outstanding dues. The lenders can neither adjudge you as a criminal nor strip you of your rights in case of default. They need to follow a designated process which allows borrower to repay the loan within the notice period. According to the SARFAESI (Securitisation and reconstruction of financial assets and enforcement of security interest) Act 2002, lenders need to provide a notice period of 60 days to the borrower, which allows the defaulter to repay the dues within 60 days of receiving such notice. Therefore, even if you have defaulted on your loan, you can exercise this right and buy yourself more time to repay the dues.

Right to be heard: During the notice period, the loan defaulter has the right to be heard, by exercising the authority to visit an authorised officer regarding the notice and put forth legal objections to it. The authorised officer needs to reply within 7 days of receipt of your plea, and provide valid reasons in case of rejection of the objections raised by the borrower.

Right to fair value: When the borrower defaults and is unable to clear the dues by the end of the notice period, the lender recovers outstanding dues by auctioning your secured asset, such as property. However, during the recovery process, the loan defaulter has the right to ensure that his/her property has been valued transparently and as per the law. Before auctioning, the lender needs to issue another notice to the borrower specifying the value of the secured asset, as assessed by lender’s valuers (whether in house or third party valuation), along with other details such as date and time of auction, reserve price etc. The loan defaulter has the right to look for prospective buyers for his/her property and inform about the same to the lender, in case he/she feels that the price quoted for auctioning isn’t fair enough.

Additionally, post recovery of the outstanding dues by the lender (through auction), the defaulter has the right to get the balance amount refunded, i.e. whatever extra amount has been gained by lender by selling the property at a price beyond the owed amount, since that extra amount belongs to him/her legitimately.

Right to humane treatment: Even while recovering their dues from the loan defaulter, the lenders, being regulated by entities such as RBI, cannot misbehave and need to follow behavioural rules during such process. In case you have defaulted on your loan, you still have the right to be treated with respect by the lender. Agents need to respect the borrower’s privacy, land up only during designated hours ( except in case the borrower’s working hours necessitate different timing), ensure disciplined behaviour and visit the borrower at the place specified by the defaulter, whether it’s the residence or place of work.

Naveen Kukreja is CEO and co-founder, Paisabazaar.com.

First Published:Jul 24, 2018 6:58 AM IST