It is impossible to meet all of one’s financial needs in today’s modern, urban lifestyle without turning to loans. Loans have become a necessary component of contemporary life, whether you’re wanting to start a new business, buy your ideal home, buy a car, or pay for personal expenses.
Not to mention, some loans, like home loans, have tax advantages that make them a popular choice for everyone. But there are always surprises in life. There are numerous occasions when things don’t go according to plan. It could be challenging for you to continue making loan payments if you lose your job, have a serious illness, or receive a financial windfall.
No matter your current financial situation, it helps to be aware of the consequences of not making your loan repayments. What happens if you are unable to pay back your loan? Do you have any rights if you default on a loan, or are you at the lender’s mercy?
In order to help you be ready for the worst-case circumstances, this article provides solutions to these questions.
Before we examine the rights of defaulters, let’s clarify some fundamental concepts you should be aware of:
- In India, failing to repay a borrowed bank loan is not a crime unless the courts determine that a fraudulent purpose was involved.
- The court is aware that defaulters deserve protection since there can be a legitimate explanation for their inability to pay. Indian civil courts give valid, legal justifications the weight they deserve.
- In India, defaulting on a loan is a civil infraction. A person who defaults on a debt cannot be charged with a crime. It means that even when you are unable to repay the debt, authorities cannot detain you.
- Note that these regulations do not apply to wilful defaulters, con artists, escapists, or those who break the law and only apply to those with legitimate reasons.
What happens if you are unable to pay back a loan?
Typically, the lender starts the recovery process after providing you several reminders after you miss a few EMIs. For secured loans, such as those for cars, motorcycles, and homes, the bank seizes the asset in accordance with the Sarfaesi (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) regulations. A bank cannot begin the repossession process without providing you adequate notice, though.
Here are the effects of not repaying the debt a borrower may be unable to pay back a loan for a variety of reasons, which might lead to the following:
1. Effect on a borrower's credit rating
The borrower’s credit score will dramatically decline as one of the main effects of loan default. The borrower’s credit score is badly impacted by defaulting on or postponing the EMI payment, which makes it harder for him or her to obtain loans in the future.
2. The Lending Institution's Reminders
The lending institution is required to send each borrower a certain number of notices and reminders. Notices regarding the late payments are delivered when an EMI is delayed once or twice.
However, the lender may take additional measures, such as designating the borrower as a Non-performing Asset (NPA), if the warnings and notices are ignored by the borrower and the EMI is not paid despite this. The borrower will be unable to receive any further credit or loans as a result.
3. Lawsuits and Penalties
Lenders may impose penalties on the borrower or even file a lawsuit if notices and reminders do not result in the loan being repaid.
Even though a few days’ worth of missing payments can still be made up for, serious harm can be done if they go unpaid for more than a month or two. If a collateral has been provided, this may be used as a way to recover the loan by taking possession of the same.
Legal Action Against Loan Defaulters
As per the RBI mandate, at no point of time will the borrower’s rights be compromised. Breach of contract when it comes to loan repayment itself is not a crime but lenders can approach a civil court in order to recover the same.
If a loan has not been repaid for more than 180 days, the lender is allowed to file a case against the borrower under Section 138 of the Negotiable Instruments Act of 1881.
Sometimes unavoidable circumstances prevent borrowers from being able to repay their loan. Such cases will not be considered as ‘cheating’ but instead the lender may work with the borrower by modifying the repayment circumstances so as to ensure that the loan is repaid. However, if the intention of the borrower is proven to be fraudulent right at the time of entering into the loan agreement, a criminal case can be filed against the defaulter.
Rights of Every Loan Defaulter
Even if the borrower is unable to repay the loan, then he/she does have certain rights in place. These are:
• Right to Notice
The borrower must be given enough time by the lender before taking action to recover the outstanding amount or repossessing the asset provided as collateral.
• Right to Fair Value
If the borrower is unable to repay the loan and the lender has repossessed the assets provided, the value cannot be solely decided by the lending institution. A fair value notice must also be sent to the borrower informing him/her of the sale price that has been evaluated.
• Right to be Heard
The borrower has the right to raise objections to the notice of repossession sent by the lender during the notice period.
• Right to Claim the Balance
In case the lending institution is receiving a high price for the asset that has been repossessed by them, the leftover balance can be claimed by the borrower.
• Right to be Treated Politely
The borrower cannot be mistreated, harassed, humiliated, or abused during the loan recovery process.
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