Education Loan Default Consequences in India
Seema completed her graduation last year but because of a weak job market, she couldn’t find a job. This was a situation that didn’t get any better with time. It’s of no surprise then that she is frustrated but what makes it worse is that her education loan’s moratorium period is about to get over. She took a secured loan from a nationalized bank 4 years ago and now her EMI period is going to start soon. She knows she will be considered a non-performing asset (NPA) if her EMI is overdue for 90 days. A number of factors have contributed to this situation, starting with the recession when many people lost their jobs as the aftermath of global crises, and an increase in the growth of educational institutions producing an oversupply of graduate students. However, another factor, and a crucial one often leading to such unhappy situations is the fact that often, the borrowers are not educated about responsible borrowing and the consequences of defaulting.
Seema’s situation is unfortunate, but let’s take it as an example and understand how defaulting an education loan will affect you if education loan is on cards for you:
Collateral: If it is a secured loan the bank can liquidate your asset to recover its losses. You will lose the rights over your property which can be auctioned by the bank to pay the bad debt. Not a situation you’d want to be in.
CIBIL score: CIBIL is the summary of your credit records. You cannot avail a loan from any banks or NBFC or get a credit card with a low CIBIL score. An unpaid loan can bring down your CIBIL score significantly, which decreases your credit worthiness, which means you won’t be able to borrow from any bank for the longest of time. Also, recovering a CIBIL score is a rather time-consuming process and requires ton of efforts.
Interest: The interest rate on the loan will keep increasing making the repayment amount huge. Not to forget, the bank will add fines as well until you pay.
Co-signer: If unfortunately you cannot repay the loan, the burden of repaying the loan falls onto your co-borrower. Not just that, the CIBIL score of the co-borrower will go down as well, thus jeopardising their future prospects as well.
Legal: You’ll be treated as an NPA (non-performing asset), and once announced as one, frequent calls and emails from banks would follow. Owing to the increasing number of NPAs, banks now have ‘collection companies’ whose only job is to get the money back. Once you make it to their list, legally, you’ll be in a lot of trouble.
Side note: After all this trouble, you will still have to repay the loan.
It’s clearly not a good situation to be in. So, what can be done to save yourself from the trouble?
At all times, do not try to avoid communication with your bank. If you have a genuine reason for not being able to payback, take your bank’s branch manager into confidence and share the reason for not paying the loan back. If the bank is convinced that it is an authentic reason they may restructure your loan and allow you to pay the lower EMI. The maximum loan repayment tenure can be increased up to 10 years for a loan amount lower than 7.5 lacs and 15 years for an amount more than 7.5 lacs.
You can always ask for a deferment period. Deferments allow you to stop making payments for a certain period of time if you have a genuine reason that can show you qualify for the same. For instance, you may be able to get a deferment if you can show economic hardship, are returning to school, are unemployed, or looking for a job.
If you have defaulted on any education loan, it is advisable to take help from someone who has experience in the industry. There are ways to save yourself from the legal trouble. If you state a genuine reason the bank might offer you One-Time Settlement, or you can also opt for refinancing. For any further information on education loan refinancing, write us at consult@credenc.com.
