Borrower Fails to Repay a Loan: What to Do?

A loan is a sum of money lent by a bank or lender to a borrower, with or without collateral. A loan agreement requires the borrower to guarantee to repay the loan amount plus interest. Borrowing a loan allows a borrower to obtain cash when they are needed, while the lender earns interest on the amount lent. The primary goal of every loan borrower is to cover a cash shortage, while What Happens When a Borrower Fails to Repay a Loan’s primary goal is to generate a profit through interest earnings.

Borrowing a loan nowadays is a simple and commonly utilized method to meet a variety of demands such as purchasing a home or a car, paying for marriage expenditures, further education, emergency needs, medical bills, and so on. Borrowers can quickly access cash by taking out a loan, which can be repaid through EMIs (equated monthly installments), which include principal and interest components. One of the most crucial things to consider when taking out a loan is that the borrower should be able to return it on time. However, if a borrower fails to repay the loan on time, certain unfavorable repercussions may occur.

What actions can the lender take in case of loan default?

According to the Reserve Bank of India’s standards, banks must allow borrowers sufficient time to repay any loan debts. In addition, the central bank prohibits banks from using ‘ muscle strength’ to recover loans. During loan recoveries, banks must follow a strict code of behavior. Here are some of the most common actions taken by banks and lenders in the event of a loan default:

  • Most lenders send borrowers preliminary reminders regarding the overdue amount, including the interest and penal interest that must be paid. 
  • Banks may offer EMI in instances such as death, illness, or accidents that may cause an unexpected pause in the repayment plan.
  • If the bank discovers that the borrower is wilfully failing on repayment or fails to present a precise repayment plan, the bank may resort to legal action. If the loan agreement includes a guarantor, the bank may contact him or her because the guarantor is liable for repaying the loan if the applicant defaults.
  • Banks usually start following up after a single missed payment. However, the next steps are determined by the borrower’s strategy and personal circumstances.

Impact on credit score

If a borrower fails to make loan repayments (EMIs), his or her credit score may suffer. All lending institutions report defaulting borrowers’ repayment track records to credit agencies, which can result in a significant drop in credit scores. This can potentially have a detrimental influence on future financing availability. Lenders look at a borrower’s credit history first when he or she contacts a financial institution for some type of credit facility. Lenders view a default history and associated lower credit scores as hazardous credit profiles since there is a significant likelihood of future defaults.

Impact of loan default on collateral

Banks’ last resort in the event of a loan default is to liquidate collateral. If a borrower is unable to repay the debt despite legal reminders, the lender’s last resort for recovering the loan is to liquidate assets. If a borrower pledges his or her property as collateral for the loan, ownership of the property passes to the lender, who may sell the property to recover the loan amount.

Conclusion – What Happens When a Borrower Fails to Repay a Loan

While borrowing a loan has numerous advantages, it also has certain responsibilities, one of which is timely return. If a borrower is unable to make timely repayments, he or she must notify the lender before the lender initiates a collection operation. Although the recovery processes change depending on the lender, it can either entail some concessions for the borrower or legal action. As a result, it is critical to obtain a loan only when one can repay it in full and on time.

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