Anisha* took a home loan from a leading bank to purchase an under-construction property in Chennai. When the builder did not construct the property as planned, Anisha felt cheated and thought it would be unwise to keep paying for the property. Hence she stopped paying her EMIs. She had no idea of all the complications one can get into when unable to pay the home loan EMIs.
It’s your legal, financial, and moral obligation to repay your debts. Not paying your debts can lead to financial complications with long-standing consequences. Therefore, if you ever find yourself in a difficult situation and think that you can simply stop paying your EMIs, you won’t be making your problems disappear. Rather, those problems could soon assume gargantuan proportions.
Dealing with your home mortgage is a challenge in money management. Often, a home purchase is the biggest transaction of anyone’s life, and the debt they’ll incur will need to be repaid over years or even decades. Repayment of a large-sized loan over a lengthy tenure will thus require financial prudence at every step of the way. But what are your options if you find yourself in a tight spot, unable to repay your dues?
The Loan Can’t Be Wished Away
If a bank or a housing finance company has financed your property purchase, it has the means to recover its dues one way or the other. A home loan is a securitized loan. In simple words, the lender owns your property until you’ve repaid your loan. So in case you miss your EMIs for three consecutive months, the lender as a first step will send you reminders for payments. Even after reminders, if you are unable to pay the dues, the lender reserves the right to start the process of auctioning off your property to recover its dues as allowed by the legal framework of the SARFAESI Act of 2002. Meanwhile, missing your EMIs and becoming a defaulter would mean that your credit score will plummet, making future borrowings very difficult if not wholly impossible. Therefore, you should look for ways to solve this crisis rather than attempting to sidestep it.
Use Loan Insurance & Emergency Fund
A lack of income poses the biggest threat to your home loan repayment. It’s advisable to have a contingency fund locked in a fixed deposit. Ideally, this fund should be at least six times your current monthly income. You could go bigger if you want to. The contingency fund will buy you time, help you pay your EMIs, and keep you from defaulting. Secondly, there are various loan insurance plans in the market that will cover your EMIs for a short period. You should consider buying such a plan along with your loan. This insurance will come handy when you’ve lost your job. However, do remember a loan protection plan is not a long-term step and you should have a concrete plan for debt repayment.
Raise Funds For EMIs
If you have exhausted your income and savings and are unable to repay the loan, it’s time to look at your other options for raising some cash. You may start off by disposing your assets – a car that now seems like a luxury, electronics you don’t need, or long-term investments such as PPF that you’ll need to dip into. If you have lost your job and currently unable to find full-time employment, consider doing part-time gigs that provide much-needed liquidity. Lastly, it’s a bad idea to borrow to pay existing debts, but with nowhere else to go, consider asking family and friends to bail you out for a few months while you look for better solutions.
Contact Your Lender
When unable to pay your home loan, it would be a bad idea to avoid contact with your lender, who would make regular attempts to communicate to you via all available channels about your missed payments. You have 90 days to pay your dues before your loan will be classified as a Non Performing Asset. The lender will pursue all legal means available to it to recover its dues. However, it would prefer to deal with you directly and find recourse. As a last option, it would initiate legal action which may become a long-drawn and expensive process. And so it’s in your interest to not get caught in a legal tangle and rather find a way to repay your loan. Therefore, maintain contact with your lender and go over any options you may be provided.
The Lender’s Solutions
Your inability to pay EMIs may be for genuine reasons such as loss of employment, a serious medical complication, or a short-term difficulty. You may persuade the lender to understand your difficulties and convince him that you would be able to resume your payments soon. You may also show your track record of repaying your previous loans on time. On a case-to-case basis, after an evaluation of your credit history and your current difficulties, your lender may agree to offer you options that can alleviate your financial stress. These may include a brief moratorium on payments, a restructured debt where you have smaller EMIs and a longer loan tenure, or a lower interest rate if applicable.
If All Else Fails…
If all these options fail and if you’re unable to find funds to continue paying your EMIs, the lender may be left with no option but to auction off your property to recover his dues. Through the auction, if the lender can recover more than what was due, the excess will be paid to you. Before the auction process, you still have the option of paying your dues or appealing against the auction to the Debt Recovery Tribunal.
When you’re repaying a home loan, care must be exercised with your personal finances. Financial planning, budgeting, and regular savings should be a monthly affair for you so that you never default on a loan.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans, credit cards, and more. * Name changed.