What Happens When a Loan is Defaulted?

What Happens When a Loan is Defaulted?
You have to constantly juggle through expenses while ensuring that your financial future is secure. One of the ways by which you can handle expenses which are beyond your immediate financial capacity is by securing loans. Loans enable you to borrow money from a bank or a Non-Banking Financial Company, and repay the amount over a fixed period of time. If calculated wisely, loans help you reduce the financial burden.
When does a loan get defaulted?
It is not possible to foresee unexpected expenses that might come your way. During such instances your savings might take a hit and so do your other monetary obligations. In such cases, if you are unable to make your monthly interest payments or repay the loan amount on due date, your lender could default your loan. A loan is defaulted when you fail to meet contractual loan obligations which you had agreed upon while availing for the loan.
How can a defaulted loan affect you?
A defaulted loan can be detrimental for finances in more than one way. Your financial burden is set to increase manifold along with other legal obligations.
Decreased credit score: Most banks give a grace period of 30 days after a missed repayment due date. In case you are unable to make amends, the lender would then notify credit bureaus about your defaulted loan status. Consequently, your credit score can take a severe hit. This would hurt your chances of availing for a loan or credit in the future. Your credit report would reflect the defaulted loan for at least six years. A poor score can also act against you in terms of purchasing insurance, getting approved for a rented space or even accessing a new mobile phone service.

Possible legal action by the lender: If you continue to not repay the pending dues, some lenders approach authorized collection agencies. They could take legal action against you and deduct the requisite assets or funds from your savings. This mostly happens in case of unsecured loans where there is no collateral linked to the loan.
In case of secured loans, which is availed against a collateral owned by the borrower, lenders can take control of the corresponding collateral.
Home loans: If the loan is secured against a house that you own, the lender can legally transfer the ownership and sell the house. If the money accumulated after the sale does not cover the loan repayment, you are expected to pay the difference.
Car loans: If you default on your car loan, the lender can take control of the vehicle and make a sale. Similar to a home loan, the difference (if any) would be charged to you.
Student loans: Defaults on student loans could lead to funds being deducted from your income or even the respective university withholding the title of your education.
What can be done in case of a loan default?
It is crucial to primarily focus on the immediate repayment of the dues and prevent further damage to your finances and credit score.
If the repayment could not be done for genuine reasons i.e. health limitations, you could inform the lender about the same. Sometimes this could prompt the lender to give you an extension or a concession on the repayment.
You could seek the help of a licensed credit counsellor to receive expert advice and explore the available options.