Purchasing the first house is a milestone for many. That feeling of being a homeowner from your own hard-earned money is surreal. Everything seems to be on track and the future looks bright…until you’re burdened with the monthly EMIs and are unable to pay back the bank.
The pandemic of 2020 led many loan takers to become an NPA (non-performing asset) to the bank. To control the situation, the financial regulator, RBI issued a 6-month moratorium period for all term loans. However, the situation doesn’t seem to show an end date yet and continues to cause chaos with job loss and pay cuts.
In such a situation, you need to understand the implications if repaying the loan took you longer than expected. In this article, we will highlight what happens from the creditor’s side when you’re unable to repay a home loan and the choices that a debtor or loan taker has in such a scenario.
Does the bank directly seize your property?
This is the first fear that arises in one’s mind. If I fail to pay back the loan, will the bank seize my house? Take a sigh of relief because it is not that easy for an institution to take away your house. Moreover, banks are not property dealers and thus capturing and selling your house will be their last resort.
There are 4 levels of proceedings before it can come to that. They are:
Level 1: When you miss 1-2 months of EMI
If you have missed only 1-2 months of EMI, do not panic. There are many reasons a loan taker can miss the repayment in some months. One could be sick that month, out on a holiday, and forget to pay the EMI, the business could face a loss, etc.
In this case, the bank will send you a simple reminder to pay your loan. At this point, you could even ask the bank for a grace period if your reason for default is justified.
Level 2: Non-Performing Assets
The trouble arises when your loan becomes an NPA for the lending bank. This happens when you fail to pay EMIs for 3 consecutive months i.e 90 days. This marks you as a defaulter in the bank accounts.
Becoming a defaulter can seriously damage your CIBIL score which makes it difficult for you to take loans from any financial institution in the future. At this point, you should get in touch with your bank representative or financial advisor to come to a common understanding to do some damage control.
Level 3: Final 60 days notice
After being registered as a defaulter in the bank’s accounts, it is liable to send a final 60-day notice under the SARFAESI act, 2002.
This law was formed to protect the rights of a lender. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Act, the lending financial institution holds the right to seize the property against which the loan is taken. It encourages a high credit flow in the economy.
Before the Sarfesi act, in case of a default by a borrower, the lender had to take the issue to court which made the whole process very complex and time-consuming.
This 60-day period is a debtor’s last chance to pay all that he owes to the bank, otherwise, the bank can auction the property. In these 60 days, loan recovery agents might show up at your door. At this point, is it important to know your legal rights to guard yourself against any misconduct:
Legal Rights of the debtor
- The recovery agent must be a registered member of the Indian institution of Banking and Finance. You as debtor hold the right to ask for his/her ID and authorisation letter before entering your house.
- The recovery agent can visit a debtor’s doorstep only between 7 am-7 pm. If they visit later or earlier than this time frame, you have the right to not answer.
- The recovery agent can only talk to the debtor and can not hold his family members responsible for the act. However, if the debtor can not be contacted or reached, then family statements can be used.
- Lastly, the agent can not threaten or use objectionable language while conversing with the borrower.
If the agent does not follow these legal guidelines, you can register an official complaint with the bank.
Level 4: Auction of the Property
As the final step, the bank will list your property for auction in the open market. Analysts will find out a fair value of the property in the market and begin the auction process.
The auction listing will include all necessary details of an auction i.e the reserve price, date, time, and address of the auction. Earlier, this listing used to be in the newspaper. Now, most of it is done online and one can easily access all the auction data.
Once the bank finds a fair value of the house, it is sold to the highest bidder and the bank recovers its money. Note that the bank is liable to take only what is owed. Any excess amount from the sale will be given to the homeowner.
These 4 levels are extreme and most situations of default do not lead to auction if handled at the right time. So what are the options of a debtor in case he/she becomes a defaulter? Read on to find out.
What are your options as a defaulter?
Becoming a defaulter in a bank’s books is bad, but it is not the end of the world. Official notice by the bank to take legal action is deemed to scare anyone. However, at this point, you mustn’t panic and look for solutions instead of running away from the problem.
1. Liquidate investments or use the emergency funds to pay EMIs
If you are short of funds to pay the monthly installments, you can liquidate some short-term or debt investments to cover some costs. You must not use long-term equity investments for this purpose as it can potentially ruin your investment portfolio.
It is best to avoid liquidating investments if you have an alternative emergency fund to cover the cost. In an ideal financial portfolio, it is advised to maintain an emergency fund worth at least 6 months of your monthly income.
2. Consider disposing of assets
In case you have exhausted all sources of income, the next option left is to consider selling off some assets that are a luxury and not a necessity. It could be jewelry, electronics, expensive furniture, or other valuable assets.
People often hesitate to use this measure. But when it is the last resort, it needs to be done.
3. Come to a mutual agreement with the bank
In the situation of a default and a potential legal proceeding, you may get scared and start ignoring calls and notifications from the bank. This is where it can all go wrong. If you try to run away from loan default, it will only give you short-term relief. Instead, try and get your bank to empathise with your situation and come to a mutual agreement.
If there is a genuine reason why you could not pay the monthly installments of our home loan, explain it to your loan provider, and if you’re lucky and give a good pitch you can be offered two relief measures:
This is a small time frame in which you do not have to pay the home loan EMI. A defaulter can use this time to re-stabilise his/her income and start paying the EMIs again.
Interest rate reduction
The bank may offer you a reduced interest rate on the loan repayment under favorable circumstances. Bring it up with your executive and see what can be done.
Another way a bank can help you in the period of default is by restructuring your loan. They may agree to bring down the monthly installment amount and increase the tenure instead. Loan restructuring is a great way to serve the interest of both the creditor and debtor.
How to avoid defaulting in the future?
Now that you are familiar with the whole defaulting process, you know it’s excruciating!
The best practice is to avoid getting into this chaos in the first place. Here are some measures you can take to avoid becoming a bank defaulter in the future:
Take loan insurance for short-term security
Various insurance plans can guard your home loan for some time in case you’re unable to pay a few monthly installments. It is advised to buy the loan insurance along with your home loan to protect yourself from any legal facades.
Keep your EMI amount less than 40% of the loan
You should never overburden yourself with a high monthly installment amount. If you’re taking a loan of, for instance, Rs. 10,00,000 then the EMI amount should not be more than Rs.4,00,000.
Try to pay the maximum down payment
As the famous saying goes, prevention is better than cure. You should only apply for a loan when you are eligible for a 40% down payment. If you don’t have that much cash, delay buying that asset!
When you pay as much as 40% initially, the EMIs will not be a big burden on your monthly expenses.
Getting stuck in a loan default situation is the last thing anyone wants. It leads to endless legal proceedings, a loss of capital, and most importantly messes with your mental peace. Try taking the protective measures illustrated in this post to avoid getting caught in this situation.
If you are already a defaulter, remember- don’t panic and take any option that’s given to you.
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