What are your rights if you can’t repay a loan?

Borrowing money can either help you or hurt you depending on how you manage it. If you can’t make your loan repayments, it’s best to take action as soon as possible. Quick actions help you minimise the damage caused to your finances. But, what should you do in the case of missed payments and defaults? If you can’t repay your loan, you have certain rights that you should be aware of.

If you stop paying up your loan, you eventually default on the loan. This will cost you more money as penalties, fees, and interest charges might build up on your account. Your credit scores may go down and recovering the lost credit scores may take several years, which means you can borrow again sometimes within just a few years. If the situation gets intense you will need to pay attention to legal documents and requirements to at least appear in court.

 

These documents might help you in justifying your case in court. However, when facing a loan default, you do not have to surrender all rights to the asset and fair treatment.

Here are the rights if you cannot repay the loan.

• Right to adequate notice

When the repayment of the loan is overdue by 90 days, the borrower’s account is classified as a non-performing asset (NPA) in such cases, the lender has to first issue a notice period to the borrower. When the borrower fails to repay within the 60-day notice, the bank will start the sale of assets. However, the bank has to serve another 30-day public notice before putting up the assets for sale.

• Right to fair valuation of assets

Before selling the assets, the lender has to provide a notice specifically mentioning the fair value of the asset, along with the reserve price, date and the time of auction. If the borrower feels the value of the asset is undervalued, you being a borrower have the right to look for a new buyer and introduce them to the lender in case you feel the asset is undervalued.

• Right to balance proceeds

Even if your asset is repossessed you have the right to monitor the process of your asset’s auction. Lenders are bound to refund any excess amount realized after recovering their dues. You have to ensure that you get any excess money acquired as it legitimately belongs to you.

• Right to humane treatment

Lenders do engage recovery agents to pressure borrowers into repaying their loans. However, the agents cannot cross the line that banks have agreed upon as part of their code of commitment to customers. These third parties can contact defaulters either at a place specified by the latter, residence or workplace. Moreover, they can make such visits at the borrower's place generally between 7 am and 7 pm. They cannot violate the norms of decency and civil behaviour during these visits. In case the agents attempt to intimidate or humiliate the borrowers or their family members, the latter can raise the matter with the lenders and finally, the banking offices.

• Credit counselling

Getting credit counselling will help you understand your situation and come up with a new perspective to solve it. Credit counselling provides guidance and support on your credit, money, debt management, and budgeting. The objective of most credit counselling is to help a debtor avoid bankruptcy and to provide primary financial education on money management. Many counselling services also negotiate with creditors on behalf of the borrower to reduce interest rates and late fees on their loans. Depending on your situation, your counsellor may suggest a debt management plan for you.

• Public assistance

You can make use of public assistance facilities in many areas. Local utilities, the government, and others provide guidance to people who need help paying their bills. These programs could provide enough relief to help you manage and stay on top of your loan repayments.

Here are some things you can do in case you are unable to repay your loan:

• Create a Budget: Assess your financial situation and avoid any unnecessary expenses. Save as much as you can and divert these funds towards servicing the loan. Create an effective budget and a financial plan to repay the loan as soon as possible.

• Informing The Lender: Reach out to your lender and explain your financial situation to them. Most lenders will consider the case and offer to restructure your loan or offer a moratorium period. This provides some relaxation, allowing you to pay smaller amounts and more time to repay the loan.

• Tenure Extension: When facing long-term financial challenges like job loss and salary cuts, notify your lender. Request for an extension in the repayment period. 

• Liquidating Investments: Consider converting your investments to cash. Withdraw amounts from your mutual funds, stock investments, FDs, etc. Use this amount to repay the loan and close it as soon as possible.

• Ask Family and Friends for Support: Speak to your loved ones and request assistance in repaying the loan. This can help you exit a debt trap and pay your loan on time. 

• Loan Settlement: In case none of the above options work for you, discuss the loan settlement options with your lender. The options may vary on a case-by-case basis. While this can help close the loan, it will have a severe impact on your CIBIL score.

Let’s talk about a long-term plan to stay on top of your loan repayments.

• Build an Emergency Fund

It’s essential to have emergency savings, some extra cash helps you to avoid problems. You don’t need to borrow when you need financial help, and you can pay bills with ease. The primary challenge is to build your emergency fund, for such emergencies. This can be done by spending less than what you earn.

• Understand Your Finances

You need a firm grasp on your income and manage your expenses by cutting down any unnecessary spending. Keep track of every penny you spend for at least one month the longer the better. Also, include expenses you only pay yearly, such as property tax or an insurance premium. Getting a hold on your financial decisions will create a good habit of smart spending and saving a lot of money.