Ill, lost your job, worried about EMI? Don't avoid your bank

Raghvendra Garg (name changed) was battling lack of income and hefty hospital bills after he was detected with a life-threatening disease. Even as the scathing pain left him numb, another worry that troubled him was the inability to pay the equated monthly installment (EMI) of his home loan.

Two months of non-payment and the bank officials approached him. Instead of informing the bank about the situation at hand, Garg started avoiding calls from the familiar number and prayed for each month of EMI payment date to pass by without much hassle.

Illness leaves one traumatised and facing recovery agents adds to the fury, but Garg could have handled the episode a little differently to be at ease with the health issue. Shutting all communication channels just makes the bank worry about your intent to pay. So instead of ignoring calls, sit across the table and discuss a solution which leads you to the ultimate goal of loan repayment as both you and the bank don't want a bad name. Discussions would be fruitful if you prove your intent to pay through your past unblemished EMI-payment record.

Take proactive steps such as informing the bank in advance about the inability to pay instead of letting the bank take action after the dishonor of cheque or EMIs. This way you would also be able to save on the cheque bounce charges and liabilities, which have steeply increased over a period and a hefty charge is applicable on multiple cheque bounce charges.

Alternative solution

If you are facing a monetary crunch for a couple of months, then you would be better off looking for temporary funds from friends and relatives than seeking a rescheduling of a loan. As Rakesh Makkar, executive VP and head – business, marketing and CSR at Fullerton India Credit says, "It is better to arrange funds from friends and relatives, if lack of funds is a temporary issue as the borrower would have to bear a fee, which may either be a flat fee or a percentage of the outstanding loan amount."

If you foresee a permanent issue at hand, then instead of letting the bank take over your property, you would be better off selling the property on our own and moving to a cheaper city or place. But this should be done in consultation with your lender.

If you see none of the channels are open, then you can talk to your bank about rescheduling the loan.

How to go about it?

Inform the bank about your problem through a letter, either delivered personally or through a relative or a reliable mail service. You can follow it up with an email mentioning the details of the letter and the reason for requesting the rescheduling of loan.

Makkar suggests, "The lender wouldn't be able to help much if the borrower informs the bank or NBFC on the installment date. The borrower should communicate at least 15-20 days in advance so that the internal team can meet the customer and get insights on the problem. If the borrower isn't personally able to come to the lender's office, then he can authorise family members to meet the officers and accordingly a collection person can visit the customer to frame the report."

Once the bank receives your letter, they would want to gauge the truth and the genuine difficulty. "We would call the customer with all the relevant documents. So, if the borrower is suffering from a medical emergency, then the doctors' observations, diagnostic test results would have to be submitted to vet whether the borrower is facing a genuine concern," adds Makkar.

What could you request for?

You should inform the bank about the difficulty and talk of definitive steps or help. So, you can either request the bank to reduce the EMI or defer the payment for a few months, especially in case of job loss. "The lender may look at reducing the loan size or extend the tenure so that the EMI is slashed to a reasonable level," informs Makkar.

If you request for rescheduling of loan or even deferred payment, you would have to bear certain charges.

Mistakes to avoid

Don't delay the loan beyond what has been committed to the bank as a further delay would raise questions about your intent to pay. Makkar warns, "If the situation comes across as a manipulation to manage the delinquency, then the lender wouldn't want to re-age the loan."

If the customer has defaulted on the loan it is reported to the credit bureaus as a delinquency as there is no escaping from the reporting clauses wherein records are submitted to credit bureaus on a monthly basis. Your default on one loan repayment affects your credit score and it becomes harder for you to get any other loan. There is no special treatment offered to those defaulting loans due to medical exigencies. "There are no facilities with the credit bureaus to allow leniency of credit defaults on the credit report," says Mohan Jayaraman, managing director, Experian Credit Bureau, India.

One should also avoid settlement of loans. "In the event of a settlement, the account status in one's credit report will reflect 'settled', as the loan has been repaid only in part. In the long run, this leaves a trail of poor credit history lowering ones' chances of getting a loan approval in future," points of Jayaraman.

Heirs liable to repay

In the case of severe diseases, borrowers are worried whether the burden of their loans would shift to the family after their death. The answer, however, is a painful yes, especially if they haven't opted for a loan insurance.

"Technically, the legal heirs are responsible for paying back the loan in the case of death of the borrower. But we may waive it off if we see that the family is facing hardships and genuine difficulty. We recommend borrowers to opt for loan insurance or credit shield to ensure that the family is not liable to repay the loan in case of any unfortunate incident," reveals Makkar.

What happens to the credit report of the deceased borrower? "The credit report is 'flagged' to indicate that the individual is deceased but is not deleted immediately… to prevent the fraudulent use. If someone were to try to use this person's identity to apply for credit, the lender would receive a 'deceased indicator' and would be able to stop the transaction, and take appropriate action. The accounts with the deceased indicator will be deleted after one year of the borrower's death," says Jayaraman.

Precautionary Steps

To avoid falling into the debt trap and forcing your family to bear the brunt of your loan, you can opt for loan insurance, while taking the loan. Under the insurance, the outstanding as on the date of death of the borrower is paid under the cover relieving the family of the burden. The premium can be paid upfront or each year, but ensure that the premium is not included in the loan amount as you would then be paying interest on the premium amount too.

"While dealing with such exigencies, having a medical insurance or opting for a guarantor at the loan application stage can also help in lowering financial burden on the borrower," suggests Jayaraman.