Loan defaults: What next?

In the recent years, especially in 2006 and 2007 there have been frequent revisions in interest rates on home loans, with the rates climbing only higher and higher.

While EMIs have almost doubled, loan tenure has extended from almost 5 to 25 years.

The borrower now is bearing an increased cost of being a ‘proud house-owner’ — reeling under the impact of hiked rates, but proud.

In any such event, you might one day find it difficult to pay your home loan EMIs on time due to several reasons. For instance, the EMI has increased unexpectedly to an unsustainable high, which is a hard hit on your personal budget. Or worse, you’ve lost your job.

Lenders have their own interests to protect. You will have problems making your lender understand why you are not punctual in your payments. But losing your cool is the last thing that will help. So, how do you go about?

It is important to convince the bank on the reason(s) for defaults. Concrete facts, rather than vague statements will give the bank a clearer picture. Which means avoiding statements such as, “I can’t pay the EMI due to some unforeseen circumstances.”

Documents supporting the unfortunate event(s) that ultimately led to the EMI defaults will convince the bank a lot better than just your verbal accounts. Show a copy of your job termination letter or bank statements showing losses incurred in business.

Next, provide an estimate of the time period you may face the crisis. If the bank is assured that the loan can be recovered, it will definitely try to put forth a plan where both your interests are protected. All this accomplished without having to take extreme measures on the bank’s part, such as sending recovery agents over or a distress sale of your home.

If it is a short-term crisis, the bank might agree to work out a deferred repayment plan in lieu of a fee or collateral security. Meanwhile, dig into your savings to keep afloat while you make alternative arrangements to meet your financial requirements.

If it turns out to be a long-term financial crisis and the savings are dipping drastically, the solution is to sell the house. You will need your lender’s consent to sell. The bank will give a document stating its approval for the sale as well as facts relating to the loan. Based on the letter, you can negotiate with potential buyers. You can sell the property after pre-paying the loan and the loan foreclosure charges.

This is a much better option than the bank-imposed distress sale. Remember, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act empowers the bank to take possession of the property that is mortgaged to them, to recover the loan outstanding from the borrower.

The whole situation is always very distressing. A little extra effort on your part may save you from this trouble: an insurance product to guard yourself against the risk of becoming a loan defaulter and losing your home. Banks these days offer insurance products bundled with the home loans.

The writer works at Apnaloan.com.