Hyderabad: Financial difficulties are inescapable in times of job loss or business failure. Your regular income stops and paying instalments can become a burden. Arrears may accumulate and it may lead to major defaults forcing the banks to declare your loan as a bad debt or an NPA. In such threatening circumstances, what should a borrower do to prevent loss of credibility?
With the news of hundreds of job losses, many are increasingly worried about their debts. There is no one who does not have some kind of debt like home loan, vehicle loan, personal loan, credit card bills, etc. They are thinking how to pay the EMIs if they don't get the salary. In such situations, when the instalments are not paid, one should know what actions the banks will take against the borrower.
What is NPA?
Banks and financial institutions treat any loan as temporary bad debt if the instalments are not paid for three consecutive months. Notices will be sent to the borrower. Banks levy a delinquency fee of 1 to 2 percent of the instalment amount when instalments are delayed. If the EMIs are not paid for up to 6 months, the banks will consider it as non-performing asset (NPA).
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The situation becomes troublesome when the loan turns into an NPA. Banks and financial institutions will consider the possibility of taking legal action. Some financial institutions are handing over their NPAs to third parties.
Credit score
If the instalments are not paid properly, the credit score will be affected. If EMIs are not deposited regularly, your credit score may fall to the lowest level. Currently, banks have linked their interest rates to repo. Apart from this, the interest is determined based on the credit score of the borrower. If you have a low credit score, there is a chance that the interest rate will increase. If banks show your loan as an NPA, your credibility will be damaged further.
Instalments
In case of temporary financial difficulties and inability to pay instalments, overdraft facility should be utilized on fixed deposits and insurance policies. All these arrears should be settled immediately after you regain financial stability. If you feel too much financial uncertainty, first withdraw from low interest investment schemes. A loan can be taken as temporary gold security. Or you can check the convenience of taking food from friends and relatives.
Things like loan insurance policies will protect you if you can't pay the EMI for a few years. These can be selected. This policy helps in case of temporary loss of job or loss of income. An amount equal to at least 6 months EMI should always be kept available as an emergency fund. This will not put any financial pressure on you. It is always safer to choose a loan tenure with a low EMI and take a loan within your financial means.
Income and expenses
Don't borrow more than you can afford to repay as instalments. Don't spend more than 40 percent of your income on loan instalments. If a person earning Rs 30,000 pays 40 percent towards EMI, can he support the family with the remaining Rs 18,000? A person with a salary of one lakh can use the rest of money for regular expenses even if he pays Rs 40,000 in instalments. So, strike a healthy balance between income and expenses.
If you want to pay off debts quickly, cut your expenses. Prepare your monthly budget. Prioritize the expenses in it. Write down mandatory bills, fees and unnecessary expenses separately. Set aside money for necessary expenses first. Don't indulge in unnecessary expenses at all. Use this saved money for loan repayment.
Debt restructuring
Paying EMIs is a difficult task when there are huge loans. There are short, medium and long term loans. When we have two or three EMIs, our financial strength weakens. You combine all personal, vehicle and card loans into one loan. A top-up on home loan will reduce interest burden. When you feel things are getting out of hand, approach the bank and think of a solution. Debt restructuring and moratoriums may provide some relief.
