The default is a reality and while one may not be wanting to evade his obligations, there might be a time when one would find himself into a difficult financial condition. This may lead to non-payment of the loan obligations. If the financial stress persists and the borrower is unable to pay up the EMIs for 90 days, he gets termed as a defaulter.
We know how important is it to have access to credit in order to meet both long and short-term financial objectives. The default would lead to cease access to credit and one may think that it is the end of the road. But, it is not true.
After having dealt with innumerable people who have had defaults in past, one thing that we can say with confirmation is that the majority of people are circumstantial defaulters. And if the person has been a victim of circumstances that lead to default, following the 2R strategy would help him regain the lost credit health and again have access to loans and credit instruments.
The 2R strategy: Repayment and Rebuilding Repayment
One thing that should be clear to all borrowers is that complete repayment of the loan is obligatory. Partial repayment can only be a stop-gap arrangement to cease the collections follow-ups. Upon finding oneself in a stressful situation, the best step would be to contact the lending institution and appraise them of your condition. Restructuring of loan or deferment of repayment for a few months is two options that can be explored. While the restructuring of the loan will entail extending the term of the loan and will bring down the monthly outflow against the instalment, the deferment will help in getting moratorium for a few months.
Another option could be to convert the higher cost debt into lower cost obligation. Like, outstanding on credit cards attract a high interest and repaying them through proceeds of another loan will bring down the interest component. In addition, a fixed monthly EMI will help in planning the monthly budget more effectively.
In a situation where any of the above options is not feasible and default getting reported is inevitable, then one must take the initiative of repaying the loan once the financial strength is regained.
In case of a secured loan, the lending institution will recover the outstanding amount from the sale of the collateral. In case the borrower feels that he would not be able to make up for the EMIs even after a few months, the bank can be informed upfront to liquidate the asset. This would help in saving on the penal charges and interest.
If the closure of the loan has happened after a prolonged period, the past default would continue to haunt till one works towards rebuilding the credit character. This entails display of both capacity and intent to repay the debt. It can only happen with a new credit line starts to reflect on the bureau report, which may be difficult to obtain. One may find himself into a paradoxical situation where the approval of a loan may not be possible for past performance and without a new trade line one will not be able to improve the credit profile.
While opting to seek professional advice on this may be a good idea, but one can make a start by opting for a secured credit card, gold loans and if approved consumer durable loans as well. This would at least kick-start the process and a guidance can be sought at a later stage if required. One thing that would need to be ensured is the repayment on new trade lines. There cannot be any delay in the repayment since even a single instance can further jeopardize the credit health improvement plan.
People face varied challenges and work around them successfully. A financial strain and a default as a consequence is also a challenge that may glare into one’s face, but a systematic approach can unquestionably help coming out of the situation.
Arun Ramamurthy is the founder and director of Credit Sudhaar, a credit advisory services company