scorecardresearch4 reasons why you must never default on your home loan

4 reasons why you must never default on your home loan

Updated: 11 Jun 2022, 09:38 AM IST

Choosing the right home loan is easy. What follows is the struggle to repay the loan amount. Defaulting on home loans will only exacerbate your current financial situation.

Defaulting on a home loan may not only result in the bank forfeiting the property but will also decrease your credit score in the long run.

Defaulting on a home loan may not only result in the bank forfeiting the property but will also decrease your credit score in the long run.

It’s indeed a good feeling to be able to buy a home for yourself and your family. But then equally daunting is the feeling that you have a home loan riding on you that must be repaid, especially, in today’s times of increased home loan interest rates. Home loan rates have gone up in the past few days, thus, also prompting a possibility of many people defaulting on the loan amounts sought.

Home loans are long-term liabilities involving huge amounts lent by an institution to inclined borrowers. While the home loan amount does help you gain access to a house of your choice, the repayment liability over a prolonged period, extending up to 30 years in some cases, can take a toll on your finances. This problem exacerbates for some people burdened with more than one loan, which means that there is a high chance of some of them missing out on one or more equated monthly instalments (EMIs). Sudden emergencies may also contribute to many borrowers falling back on their financial commitments.

Impact on credit score

Defaults on home loans can be a costly affair in the long run, so it is always better to keep the lender informed in case of a sudden inability to repay the loan amount. There is a high risk of the bank seizing the home you submitted as collateral for taking the loan. Borrowers must take care not to default on loans or ensure that the lender is informed about their inability to repay the loan on time.

The lenders, in most cases, increase the loan tenure to reduce the burden of EMIs due every month. For big loan amounts, lenders exercise some tolerance for borrowers missing out on one loan instalment. However, in case of multiple defaults, the consequences can take a direct hit on the borrower’s credit score along with the risk of losing the property to the bank.

Loan defaults drastically reduce the credit score, which in turn affects the borrower’s ability to seek future credit. Lenders usually reject the loan applications from low credit score loan applicants or charge very high-interest rates.

Effect on co-applicant’s creditworthiness

Defaulting on a joint home loan taken has an equally jolting effect on the co-applicant’s credit score. This is because the effect of the borrower’s inability to repay the home loan amount is not limited to the primary applicant alone. Co-applicants in a joint home loan suffer from low credit scores owing to defaults, thus, making it difficult for them to apply for a new or different loan amount.

Penalty charges on delay

It is a common trait to prefer borrowing from a lender that charges less on loans. This causes many borrowers to overlook other home loan charges while comparing loan rates and choosing the cheapest home loan available. One must look at the penalties that would be charged on late payment or non-payment of the EMIs. These charges are not fixed and vary between lenders, thus, leaving many borrowers susceptible to paying steep penalties due to loan defaults.

Difficulty in getting top-up loans

There is a possibility of many borrowers applying for added loans called top-up loans. These include personal loans to cover contingencies or pay for home renovation, improvement and extension. Defaulting on home loans will only make it difficult to avail of more such loans in future.

Instances of defaults on home loans are on the rise. Most defaults are on loans exceeding 75 lakhs with many people also finding it difficult to pay off mid-range loans in the range of 35-75 lakh and the affordable segment up to 35 lakh too.

The effect of home loan defaults is far-reaching with the borrowers facing financial burden due to penalties coupled with the erosion of creditworthiness in the long run. Considering how the risk of defaulting on loans may quickly turn into your inability to repay loans, if not checked in time, it is best advised to inform the lender in advance of the possibility of loan default and seek a moratorium of a few months on the same.

This is what banks can do to the stressed loans. 
First Published: 11 Jun 2022, 09:38 AM IST