Before you incur debt, especially a large, long-term debt such as a home loan, you need to take two measures to protect your finances.
When we take a loan, we assume that we’ll keep generating income that will help pay off the debts as planned. But situations such as a loss of job, loss of income, and health problems can throw a spanner in the works. What happens when paying EMIs becomes a struggle? What are your options as a borrower? What are your lender’s options? Let’s take a deeper look.
THE LOAN STILL NEEDS TO BE PAID
If you’ve taken a loan, it needs to be repaid. The consequences of non-payment will negatively impact your long-term finances. Late payments will start wrecking your credit score. Non-payment for more than 90 days will render your loan a Non-Performing Asset (NPA) for the lender, after which the provisions for loan recovery will kick in. Apart from the late payment penalties and burgeoning interest, you may also face legal action if your post-dated cheques given to the lender bounce. In case of securitised loans such as home loans, the lender owns the property till the loan is paid. The property can be auctioned to recover the dues as mandated by the SARFAESI Act.
PRE-EMPTIVE STEPS TO PROTECT YOURSELF
Before you incur debt, especially a large, long-term debt such as a home loan, you need to take two measures to protect your finances. Firstly, take a loan protection policy at the start of your loan. It may cover you or your family in certain situations. For example, in the case of the borrower’s death, the policy will settle the loan balance, keeping the borrower’s family from financial harm. Such a policy may also provide EMI protection for a fixed number of months in case you lose your job in predefined conditions. Secon-dly, you must build an emergency fund that can cover your EMI payments – for six to 12 months at least, or more if you think it is necessary.
RAISE FUNDS FOR SHORT TERM
Non-payment will harm your credit score, and you may lose the asset for which the loan was taken. So the key is to find a way to keep paying the EMIs. Look for ways to raise funds for the short-term. Liquidate short-term savings such as fixed deposits. Next, look at your long-term investments: PPF, endowment plans, EPF, mutual funds, stocks etc. Start with the investments performing the worst and leave your best performers for the last. Once these are exhausted, consider liquidating personal assets: jewellery, gadgets, vehicles, or anything that may help raise cash. Lastly, consider asking for friends and family for an interest-free loan to help you out. These are short-term measures until you get back to being able to pay your EMIs normally. If your financial problems persist, consider selling off the asset (home or vehicle) for which you’ve taken the loan.
MAINTAIN CONTACT WITH YOUR LENDER
After your first missed EMI payment, your lender will send you routine reminders for payments as mandated by the RBI and as mentioned in your loan agreement. The reminders will be sent to you through possible channels of communication, including in-person visits from the lender’s representatives. At such a point, it would be wise to maintain contact with your lender to appraise him about your financial difficulties. Not responding to the communication will not make the debt go away. Rather you must communicate with the lender and explore all possible options to make your payments easier. The options may include adjustments in interest rate, loan tenure or EMI size, which may make the payments slightly easier for you. At the same time, you’re entitled to receive humane treatment from the lender, and acts of coercion and violence are against the law.
WHAT THE LENDER WILL DO
Having pursued all the above options, the lender will, finally, look at options to close the loan. Thirty days from the first default, the lender will have to create a loan recovery plan which it can then put into action in another 180 days. This gives you a maximum of seven months to sort your finances out. In the plan, a securitised loan can be recovered through the auction of the asset. You’re allowed to be part of the auction and claim surplus proceeds if any. In unsecured loans such as credit card debt or personal loans, you may receive a settlement option from the bank: pay part of your principal and interest dues and consider the loan settled. However, this is only a partial repayment, and while it will end your problems with this particular loan, the settlement will reflect in your credit report as an inability to pay your dues in full. This will lower your credit score and make future borrowings very difficult.
Managing your EMIs du-ring financial difficulties is extremely challenging. However, you must plan for these trying phases and keep looking for ways to repay your dues. Full and timely repayment will ensure you continue to get credit in the future.
The writer is CEO, BankBazaar.com