There are times when we cannot pay the EMI on loans. The reason could be because of loss of steady income or sudden illness. Just like heavy long term debt increases a company’s financial distress level, loans do the same to individuals.
Defaulting on the payment is a serious offence and we should avoid it at all cost. However, there are circumstances beyond our control that can make us default on the payment. This case, though not common, should not disturb our good sense or else things will go out of control.
Usually, in case of home loan, banks do not call you immediately if you miss 1-2 EMI. However, if this continues to 4-5 EMIs, banks will start chasing you. In case of car loan and personal loan, missing even 1 EMI can cause the banks to call you. It is completely in the discretion of banks. Few banks will not even wait for 1-2 months for any kind of loan. Missing a single EMI is reason enough for the banks to call you.
Why we default
Most of the time, defaulting on payment is temporary in nature. It could be because of loss of job, a temporary extra expenditure that left no money to make the payment for EMI, or a prolonged illness which caused you financial distress as well as kept you in hospital for a few months.
In very rare cases, people default because of permanent failure or sudden death of individual who wasn’t ensured or did not have enough resources left for his or her family. We cannot do much in these rare cases.
However, we can certainly manage the temporary cases very well. Most of the people get panicky and further worsen things.
What should we do?
The first and foremost thing to do is to inform your creditor or bank about the temporary problem that you are facing. Discuss with the banker and come up with a solution which is acceptable to you. Never hide from banker and ignore the calls. Remember that you owe to the bank.
Additionally look at other options. Is it possible to reduce the EMI and increase the tenure so that you outflow can be reduced? Banks usually are flexible on this front.
If your interest rate is high, look for other options such as refinancing the loan from other banks, negotiating with your banks to reduce the interest rate, or pay it with cheaper money. The cheaper money can come from your friends or relatives.
Last, reduce your expenses. This one step will do immense good to you, not only to overcome this problem, but also for future financial security.
How to handle debt collection agents
Let’s discuss this point separately. We have heard horror stories about how debt collection agents harass borrowers. There are few points that you should keep in mind when debt collection agents call you.
First, be polite but firm in your response. Never respond with anger or abuse. If the discussion crosses civil language, stop the conversation and talk to your bank. Banks have become quite responsive on these cases and they do redress such issues quickly. If the bank doesn’t take any action in 30 days, escalate this to banks ombudsman.
Finally, you should know your rights. RBI has issued clear guidelines on debt collection practices. The guidelines clearly states that the collection agent cannot harass you mentally or physically, cannot call you at odd times, and banks are responsible for any misdeeds of recovery agents. Read more about this at RBI website: http://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=4141
IBA, the apex body for bankers, has also issued model code of conduct for recovery agents in the similar lines. Read more about model code of conduct at http://www.iba.org.in/Model%20Policy/d)%20IBA%20Model%20Policy%20on%20Collection%20of%20Dues%20&%20Repossession%20of%20Security.pdf
There are enough provisions for your protection from any undue harassment. Know your rights and act accordingly. These rights, however, should not make you feel that you can default on the loan. These guidelines are there for ensuring that the discussion, in case of default, remains within the civic conduct.
In the end
Remember that you have taken the loan from bank and it is your duty to return it with the interest. While there are times when situation is not in our control and we have to default, there is no excuse of not informing banks about your situation and find out a common solution. Do not wait till the bank hands over your account to a recovery agency. Communication is the key here and any lie or miscommunication can complicate the issue further.
Banks have every right to go after you and recover the loan amount due to them. Borrowers cannot escape this.