Defaulting on a secured loan: How to fix the damage?


Defaulting on secured loan

Can we interest you in a story? Don’t worry, it’s short  ¯\_(ツ)_/¯

A recent incident inspired us to pen this down (or type it if we are being literal). Few days back, a customer applied for a personal loan at our company. He had an excellent credit score and a stable income source. Since he was handsomely paid, we were sure he would get a loan, after all a credit score above 800 is difficult to deny loan. So, we went forward and sent his loan application for approval to our partners. Unfortunately, all of our partners rejected his loan application. When we were informed that he was denied a loan, it came as a shock to us as well as him. 

Now the question is, what went wrong? 

When we asked our lending partners the same, they gave us some information that we had no clue about. Our customer, Mr. Akash had a blemished credit history. A few years back he bought a Honda city that cost him around Rs. 14 lakhs. He had some money on him but not enough to buy the car all by himself, so he decided to take a car loan. He was supposed to pay an EMI of Rs. 20,000 approx. for 5 years as decided by the loan clauses. Some unfortunate circumstances arose and Mr. Akash ended up losing his job.

Mind you, all this happened 3 years back. He was unable to pay off his monthly installments and ended up with multiple default notices from the bank. He didn’t have a job so he couldn’t pay the upcoming EMIs either and ended up losing his car (collateral). Wondering why are we telling you all this?

To start with, the car loan taken here by Mr. Akash is a classic example of a secured loan. The short term implications of defaulting on a secured loan are losing the asset but have you ever thought about what could be the long term effects? Before we explore in depth about secured loan default, let’s give you a basic idea about what secured loans actually are and how they work.

What are secured loans? 

Whenever a borrower keeps a property (a house, car, gold etc.) as collateral in order to get the loan amount approved by the debtor, the loan is called a secured loan. The collateral serves as a security for the loan to get sanctioned.

The item (asset) pledged as security serves as a powerful motivator for the borrower to pay back the loan on time. Nobody wants to lose their home or car, right? Every monthly installment needs to be paid off in a timely fashion or the debtor can sell off the property due to the lien issued on it. No idea what a lien is? Basically, a lien is the legal term for the debtor’s claim on the borrower’s collateral. The lien allows the debtor to formally/legally get the property rights.. In case the borrower fails to repay the loan within the stipulated time span, the debtor may sell off the asset in order to raise the loan money. 

What happens when you default on a secured loan?

First of all, we would like to warn you that defaulting on a secured loan is an absolutely NO-GO zone. And we are in no way suggesting that defaulting on an unsecured loan is okay (don’t even get this idea in your head) but all we are trying to say is that defaulting on a secured loan has relatively harsher implications. The consequences could be –

  1. Credit score : A fall in the credit score is the mildest of all the repercussions you will face when you default on a secured loan. It would be the same for an unsecured loan too. You credit score would take months to recuperate once it slumps. No bank appreciates late payments. This reckless behavior is penalized by the bank mercilessly by giving a major blow to your credit score rating.

  2. Collateral damage: The meaning of this one is as literal as it gets. There could be issues with getting back your collateral since the debtor will try to recover his money legally on the basis of lien if you fail to pay back the loan amount. This means, you lose your “asset” or collateral which could be anything ranging from your house to car or even gold. Nobody wants to lose the house they are living in or the car they use daily to get to work. This one hits real hard.

  3. Loan approval: Surprised much? It might come as a shock but getting loan approval once you default on a secured loan is a difficult. The problem with defaulting on a secured loan is that not only does it ruin your credit score in the short run but it leaves a long term mark on your credit history. If you apply for a loan in future, chances are a debtor will refuse you even if you have a fantastic credit score. And you will be shocked as to why? We are telling you the reason here and now. It’s because of you defaulting on the secured loan years back. You are a black sheep for a number of years to come with this one.

How to fix the damage caused by loan default?

There is no miracle that will happen overnight. You can be rest assured that it will take time to build back your credibility when you default, especially in the case of a secured loan. But like all sticky situations in life there are some ways to get out of this one. By following these simple steps your credit score will improve and your credibility will start to build again

The one way that could do wonders is taking SMALL CONSUMER DURABLE LOANS. Wondering what consumer durable loans are? Let’s give you a brief.

What are consumer durable loans?

Loans that are taken for the purchase of mechanized/electronic goods like washing machines or refrigerators are called consumer durable loans. This line of credit is used frequently by people who wish to buy appliances but can’t pay the amount in one go. They decide to pay it off in the form of regular EMIs with minimum interest rates.

How do consumer durable loans help?

Consumer durable loans of under one lakh are easily available. There are instances where banks don’t even charge interest rates on EMIs specially when it’s for a time period of under 6 months. This means that you can avail the benefit of 0% EMI while paying off the loan amount and simultaneously build credibility. If you regularly pay off all installments then you will realize that you eventually start climbing up the ladder. The banks will start having faith in your paying back potential again and will be gradually willing to lend you from smaller to bigger amounts. This means – MISSION ACCOMPLISHED!

We hope that now you have got some idea as to what to do in a similar situation. The obvious advice from our end is to stay away from defaulting on any kind of loan, be it secured or unsecured (more so secured). But, even if you do, then don’t worry, it’s never too late to turn things around, just follow this guide and you are good to go!

Written by

Priyanshi Bhardwaj