Repayment Challenges: What Borrowers Can Do To Avoid Loan Defaults

Loan default can result in harassment by the lenders on one side and also damage the borrower’s credit score on the other side, which can make borrowing difficult in the future. Whether it’s a home loan, car loan, personal loan, or any other loan, a payment default can not only lead to harassment but also to legal action. To avoid all this, borrowers need to plan in advance various aspects related to borrowing, such as the loan amount, stability of income, a backup plan to maintain a regular source of income, etc. Usually, small consumer loans witness a high delinquency rate, leading banks to apply pressure tactics on borrowers to recover money.

Let’s understand what happens when a borrower misses an equated monthly instalment (EMI) payment.

When a payment is missed, banks send a reminder to the borrower, asking them to make the payment. It levies a penalty for late payment but does not initiate the recovery process. However, if a borrower does not pay the EMI, banks usually send a 60-day notice to the borrower, giving an ultimatum to settle the dues or face consequences. If the EMIs remain unpaid for more than 90 days, the loan becomes a non-performing asset (NPA). This is when a bank can officially initiate the recovery process, including legal action.

What Can Borrowers Do To Avoid Loan Defaults?

A default in loan repayment is often the result of inadequate planning. When one takes a loan, one must plan repayment at the same time. Yet, unexpected situations arise, and one may struggle to pay back on time. To avoid this, borrowers must plan well in advance.

Create An Emergency Fund And Keep Track Of Cash Flows

One must maintain an emergency fund that can cover at least six months of expenditure, including loan EMIs. This will not just provide a financial cushion but also peace of mind if situations like job loss or medical conditions occur.

Ananth Shroff, Co-founder & CEO, DPDzero, a platform that helps lenders recover debts, suggests, “Avoiding a default starts much before the EMI due date. Firstly, borrowers should borrow within their repayment capacity, maintain an emergency fund, and treat loan repayments as a priority expense rather than a residual one. Tracking cash flows proactively and responding to lender reminders instead of ignoring them also helps.”

Communicate With The Lender Early

In case financial planning does not go as expected, and finances fall short, it is important to inform the bank early. Usually, banks offer different ways out for such situations. They may revise the EMIs schedule by extending the period and reducing the EMIs, or advise loan restructuring, or other options.

Shroff says, “Many lenders are willing to work with borrowers facing genuine financial difficulties. Depending on the situation, options may include temporary payment relief, revised repayment schedules, loan restructuring, or settlement discussions, and sometimes, even a percentage waiver on interest. The key is to approach the lender before the account deteriorates and turns into a default.”

Lenders simply want to have their money back, and thus, in most cases, they work out ways that can stop the borrowers from becoming defaulters.

Don’t Over-Leverage

Getting a loan has become much easier as lenders are willingly offering it. There are many mobile apps as well that offer loans with a simple onboarding process and just a few clicks. But one must not borrow more than needed just because it is easily available.

“One should avoid overleveraging and maintain a healthy debt-to-income ratio. If a borrower has a good sense of their Fixed Obligation to Income Ratio (FOIR), it helps them plan their future repayment schedules and loan-taking capacity in a better fashion,” says Shroff.  

In addition to this, one can explore other ways, such as transferring the loan to another borrower offering lower interest, exploring additional income sources, reducing discretionary expenditure, and making advance payments whenever possible to stay in good standing.

As Shroff says, “Repayment challenges rarely emerge overnight. Identifying and addressing them early on significantly improves the chances of staying current on obligations.”

Getting a loan is easier these days, but to make it work for, not against, borrowers must plan repayment in advance, and always keep a backup source of income or an adequate emergency fund to avoid being declared a defaulter and affecting the CIBIL score.