With inflation rising, Studies shows that several borrowers are in a risky financial situation at present and are in a high risk to default on loan. Default in borrowing comes with some consequences. A defaulter means a borrower, who has not paid his EMI amount to the respective financial institution. As per the Reserve Bank of India (RBI) regulations, banks consider default on loan after 90 days are completed of non-payment of EMI.
Defaulting on loans will have a impact on the credit score of the borrower. Because of which, person won’t be able to access credit from earlier financial institutions. Even after that, if he somehow manage to get a loan, the rate of interest will be much higher than usual.
In a present scenario, several employers run a credit check before hiring employees. So, defaulting on loans can possibly impact future job prospects too.
So, what to do when you know you are about to default in your borrowings??
You can talk to your bank manager and explain the present conditions to your lending institution. There is a possibility that your bank may restructure the existing loan ( it means reconsider balance payment as new borrowing with increased tenure and slightly higher interest rate). But, remember to put such communications in writing.
If you lose your job or if there is salary cut, then stop or reduce using credit cards for your everyday transactions. It will only increase your credit card outstanding by every month. Annually, you will end up paying an interest of 36% to 42% per annum on such outstanding balance.
If you have an endowment policy and an outstanding loan, you would be paying a higher rate of interest on the loan as compared to the return you earn on the endowment plan. In this situation, it makes sense to surrender your endowment plan or take the loan against the endowment plan and repay the loan.
In case you have invested in mutual fund schemes or unit linked insurance plans (ULIP) which are giving moderate return or even low return, you can sell them off and repay your loan.
There is also an option to buy insurance policy to cover your EMI payments, in case of a job loss. There are some agency like “Bajaj Allianz Loan Care”, they takes care of up to 3 EMI’s in case the policyholder’s employment is terminated. However, policy won’t help if policyholder voluntary resigns from his job.
Some insurers like ICICI Lombard Group Secure Mind, offer “Group covers” that secures borrower in case they default on repayments due to reasons beyond their control like job loss, accidental death, critical illness or else, permanent disablement. For example, the policy will take care of the borrower’s EMI payments during the policy period or till the policyholder gains employment, whichever is earlier. But this is a group policy, so, one person can not buy it.
So, this is well established fact that you should not rely too much on loans and advances, whether it is bank borrowing or credit card debts. For emergencies, maintain short term investments or flexi deposits.
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