One of the main topics you hear every day is "Loan Defaults". The question at the top of your mind is "Why Do People Default On Their Loans? " The borrowing habit is a bad one and one's it goes out of control there is no stopping it. It fuels a vicious cycle of debt. For a number of years personal loans was a lucrative business for banks and the "Make Hay When The Sun Shines" attitude was followed. However after a series of defaults in personal loans banks found these a "Hot Potato". Personal loans in the range of INR 20000-INR 130000 have a default rate of over 60% and this has led banks to scrap personal loan lending in this segment.
So Why Did Defaults Occur In Personal Loans? These loans are mainly a debt trap. People take up personal loans to pay back other loans. There was a famous case in which a person had taken an INR 50 Lakh personal loan from a number of banks to pay back his installments on a BMW car. When he defaulted on his loan payments it was found that he had no proper source of income. Banks have even set up a list or a negative category of borrowers to whom personal loans are generally not given. These are mainly low profile taxi drivers, jewellers, journalists and travel agents. Since these loans are unsecured the temptation is very high to default on them.
So Why Do People Default On Their Home Loans In India? One of the most common reasons for default on home loans is the rising prices of homes in the Metros. Prices of homes even in smaller cities are skyrocketing. The high cost of land is one of the main reasons why affordable housing is not possible in major cities. This leads to people defaulting on their home loans. A sudden rise in interest rates and inflation also leads to a default on home loans. People feel that their Equated Monthly Instalments are too high and this causes them to default on their home loans without caring about the consequences. Job losses also contribute to defaults in the home loan sector.
Many customers tend to follow the wilful defaulters route where they sell the pledged collateral without the knowledge of the bank. Defaults are frequently observed in one's credit card debts. Even though credit card splurging is on the rise the banks have turned extremely cautious in this sector. Banks prefer a few good customers rather than many bad customers. Another major sector in which defaults occur is the education loan segment. Students take up loans in MBA Colleges and Engineering colleges in the range of INR 4-10 Lakhs and default on their loans due to declining job prospects and a slowdown in the economy of the country.
A number of substandard educational institutions have been set up in our country literally "Growing Like Grass" which has made employers wary of hiring pass outs of these colleges and this has contributed to a default in the education loans in a bank's portfolio. Educational loan defaults are now more than double the credit card defaults and are a major contributor to the bad debts of banks. Banks cannot take guarantees for educational loans up to 4 Lakhs and a large number of defaults are in this range. When students complete their education many a time they get jobs in Western countries and flee abroad and disappear without a trace. In this case "Better Safe Than Sorry" approach is the best one to be followed.
A question at the tip of your tongue is "What Are The Implications If I Default On My Loans" .Home loans come up for repayment mainly on the first day of the month .A grace period of 15 days is granted for the repayment of the home loan. If you do not repay the loan within this period a late payment fee is charged. Let us consider that one has missed three consecutive home loan payments. One is now in a dire situation. A notice of "Default" is sent to the borrower and the lender might want to initiate the foreclosure proceedings. At this time you are caught between "The Devil And The Deep Sea". Another implication of defaulting on your home loan is the "Name and Shame" approach being adopted by the banks in which banks publish the names and photographs of wilful defaulters and their guarantors in the newspapers and at their area of residence to make them pay up.
This is done after giving them a 14 day notice period. If you do not payback your home loans then banks can "Hold The Money In Your Bank Accounts To Ransom". After settling your home loan dues your money will be released. After a home loan is classified as a non performing asset a notice is sent to the borrower to settle the amount within 60 days. If the borrower does not settle his dues the bank will take possession of his mortgaged home and auction it. A notice is sent to the borrower indicating the date, time and the venue of the sale .In the case of a movable vehicle such as a car the bank will issue a notice to pay the dues within a period of 7-15 days and then take possession of the pledged vehicle.
What happens if one have successfully duped his bank and escaped without making up those EMI Payments? Now can't one approach another bank and take up another loan? Three years have passed since one has defaulted on those loans? How will the new bank ever find out? You now approach the new bank for your home loan but it is not sanctioned. Are You Surprised? How Did The Bank Find Out? The answer is CIBIL (Credit Information Bureau).All the banks and major lenders submit the credit history of their borrowers for the past month and CIBIL analyses this data and sets up a score ranging from 300-900.Making of late payments, high utilization of credit limits, A very large number of personal loans and credit cards taken, A number of sanctioned loans and dues on a credit card all of these mean one is red flagged. Your score would be close to 300 and your loans would be most likely rejected .The CIBIL Trans union score 2.0 is an upgraded version in which you have a score range of 1-5."1" signifies high risk and "5" signifies a low risk. Another reason is the deficiency in the personal portfolio. Too many debts, inaccurate information and frequent job hopping results in a high likelihood of your loan being rejected.
One of the prime reasons why one falls into the debt trap is the lack of financial knowledge and awareness on this subject. IndianMoney.com aims to bridge this gap by providing free financial advice on a wide variety of financial topics which is very necessary for the healthy growth of your finances. Finances are like a plant. They require proper nurturing for their growth just like plants require sunlight, manure and water. Proper financial awareness and financial advice is the care that is needed in order for your finances to keep track with your goals and aspirations. I would like to remind you that the team of Financial Planners at IndianMoney.com are always there for you to plan your financial needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111. When it comes to your loans IndianMoney.com believes it is always good to be in the safe zone while availing those loans.
IndianMoney.com always advocates that one should study the eligibility criteria of his/her loans.
A personal loan has a minimum age criteria of 18-21 Years. A net income of INR 1-2 Lakhs per annum is necessary. A loan amount ranging from INR 50000-INR 15 Lakhs is generally available.
A home loan has a minimum age criteria of 18-24 Years. A net income of INR 1-1.5 Lakhs per annum is necessary. A loan amount ranging from INR 2 Lakhs –INR 2 Crores is generally available.
A car loan has a minimum age criteria of 18-21 Years. .A net income of INR 1-1.5 Lakhs per annum is necessary.
A loan against property has a minimum age criteria of 18-24 Years. A net income of INR 1.2-2.0 Lakhs per annum is necessary. A loan amount ranging from INR 2 Lakhs –INR 1.5 Crores is generally available. The land should be within the municipal limits and 50%-60% of its value is sanctioned.
Student should be between 16-35 years of age .Co Applicant of the loan should be between 21-60 Years of age. In India generally a loan of up to INR 10 Lakhs is provided for studies done in the country. For Foreign studies the amount sanctioned may be up to INR 20 Lakhs. In certain cases it might go up to 30 Lakhs.
One needs to file the past 3 years Income Tax Returns in order to avail of a loan as a general criteria. One needs to understand that a personal loan is an unsecured debt. It is obvious that the bank would want some kind of a safety net that you would repay the personal loan amounts. For this one needs to file a single year's income tax return. One as an alternative can show his salary slips or a single years Form 16. Always be in the good books of CIBIL. Never unnecessarily delay your EMI payments .Always prioritise the payment of your dues and set funds aside in order to make your payments on time.
Late payments or defaults of loans in the recent past means you will be provided with a lower credit rating. When a person uses a credit card he can avail of an amount called credit limit similar to loan talk time provided by some Telecom providers on their prepaid cards. Similarly on credit cards one can avail of such schemes .CIBIL monitors the number of times these are taken up and higher the usage, lower would be your score. This needs to be understood and monitored by the borrowers of the loan. Take higher percentage of secured loans like Auto Loans and Home Loans rather than unsecured loans which are not covered by collateral. A higher proportion of collateralized loans means a higher credit score. Credit Hungry loan applicants are viewed with caution as this indicates a debt burden already borne by the loan applicant and his inability to service further debts.
Borrowing can become a bad habit and one may borrow more than he can repay. This is similar to gambling where a person is in a high state of euphoria during the state of the game and keeps playing on borrowed money. This might take away money from certain important needs and the person might have to compromise on his day to day needs such as paying his day to day expenses, and the amount payable keeps accumulating until it becomes too hot to handle.
In order to avail a home loan one has to file at least 2 years of income tax returns. The home loan amount sanctioned is at least four times your net income .I would like to explain how banks calculate your net income when loans are sanctioned for your homes Mr Sandesh wanted a home loan sanctioned by the bank for an amount of INR 30 Lakhs. He doesn't have any other car or personal loans. Bank rules generally have an eligibility criteria which ranges to about 60 times monthly net income. Mr Sandesh had a word with the bank executive over the phone and stated that his monthly income was around INR 50000.
Since the rule of thumb is about 60 times the monthly net income the bank agent stated that his 30 Lakhs would be sanctioned. An elated Mr Sandesh was filled with relief. Things changed drastically once he submitted the necessary documents, salary slips and paid loan processing fees. The salary slips still showed a net monthly income of INR 50000. So What Had Changed? Why Had It All Not Gone According To Plan? Normally a salary consists of the following components: Basic Salary, HRA, LTA, Medical Allowance, Performance Bonus, Conveyance Allowance, Special Allowance, Food Coupons, PF and other allowances. Banks do not consider medical allowance and LTA amounts in the net income. The total amount of LTA and Medical Allowance of Mr Sandesh was INR 5000 per month. According to the rule of thumb this amount multiplied 60 times gives a value of INR 3 Lakhs. This amount will not be considered in the sanctioned loan amounts and he gets around 27 Lakhs. The remaining amount of INR 3 Lakhs would not be sanctioned and he has to arrange this from other sources.
I would like to end this article with the famous phrase "Some People Dream Of Great Accomplishments While Others Stay Awake And Do Them".
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