Defaulting on a bank loan has serious repercussions. When you fail to repay your loan, you are deemed to be a defaulter by the lender and the same is reported to the credit bureaus. This default can have several consequences such as tarnishing your credit score and affecting your financial credibility for an extended period, making it difficult to avail funds in the future.
Implications of loan default
Firstly, it is crucial to understand the implications of defaulting on a loan. When you apply for a loan, banks and financial institutions primarily rely on the credit score to assess a person’s loan eligibility. If an individual defaults on his loan, the credit score takes a significant hit, making it challenging to secure future loans.
The consequences of a default vary based on the type of loan you have defaulted on. If you default on a secured loan, the financial institution is within its legal rights to use the collateral and auction it to recover its dues. If you default on a personal loan, your credit score will be adversely affected, making it very difficult to avail loans or financial products like credit cards, etc. So the first step is to settle your outstanding dues after negotiating with the lender.
Busting myths
Defaulting on a loan creates a negative entry in your credit history, which can remain on record for a certain period. However, you can borrow again if you can streamline your finances and repay your debt. Avoid delayed or missed payments, and if possible, automate your crucial payments so that you don’t ever forget to pay your debts on time.
Improve your credit score
After failing to pay your debts, your credit score may look in very bad shape. It may drop to a level where you may think impossible to revive it again. But, you can still work around your score and take it back to a good position. Consistently make on-time payments to build a positive payment history over time.
Whether it’s your credit card or other types of loans, make sure you make timely repayments against the debt. One of the key reasons of having a low credit score is missed or late payments.
Adhil Shetty, CEO, Bankbazaar.com, says, “Your credit score is not set in stone; it’s an opportunity for improvement. Pay your bills promptly, reduce your debt burden, and review your credit report for errors. Establish a positive payment history and diversify your credit types. Maintain older accounts and avoid frequent new credit applications. With patience and responsible financial habits, you can reclaim your creditworthiness and unlock a brighter financial future. Remember, it’s never too late to rebuild and strengthen your credit score.”
Once you have improved your credit score, you may be able to apply for a loan again. However, you may still face some challenges. Some lenders may be reluctant to approve your loan application, and you may have to pay a higher interest rate.
When you can apply again
Wait for a substantial period after defaulting before applying for a new loan. During this time, you can focus on improving your credit score by making timely payments on any remaining debts, reducing outstanding balances, and demonstrating responsible financial behaviour. Over time, as your credit score improves, lenders may be more willing to consider your loan application.
“Once you have improved your credit score, you may be able to apply for a loan again. However, you may still face some challenges. Some lenders may be reluctant to approve your loan application or may charge a higher interest rate. Despite this, there will be several lenders who may be willing to give you a loan seeing improvements in your current income and credit records built over time,” Shetty adds.
There is no fixed time when you should apply for a loan again. Moreover, you don’t need to apply for loans immediately after your finances have improved. It is not advisable because every time you apply for a loan, a hard inquiry is made on your credit report. Hard inquiries can stay on your credit report for some time, and they can lower your credit score by a few points. If you apply for too many loans in a short period of time, it can have a significant impact on your credit score. Take some time and apply for a new loan only when you actually need it.
While applying for the loan after a previous default, make sure that you understand the terms of the loan and can afford the monthly payments. Compare interest rates from different lenders to avoid high interest rate and EMIs. Keep your EMI as much as that it does not hamper your other financial commitments. Finally, apply for a loan only if you have a specific financial goal or need.
BORROWER’S CHALLENGES
- If you default on a loan, the credit score takes a significant hit, making it difficult to get a new loan
- Start building a positive payment history again with timely payments
- As your credit score improves, lenders may be more willing to consider your loan application