How to Banks Deal with Loan Defaulters?

It’s not uncommon for borrowers to default on a loan. Sometimes people are unable to repay their debt due to financial problems, and sometimes people default on purpose for unethical reasons. Either way, banks have a variety of ways to deal with such problems.

The following are some of the typical ways a bank can deal with a loan defaulter:

1. Restructuring the Loan

If a borrower is under financial strain and unable to meet their expenses, then the bank can offer to restructure their loan. In this, they increase the tenure which then lowers the amount of the EMIs. The math is simple- when a loan is to repaid over a long time then the total debt is divided into smaller installments.

The problem with loan restructuring is that the total debt increases because of the higher interest amount. So, it may be a good idea for short-term relief, but in the long run, it can cost a lot.

2. Bonus Period

Sometimes the loan problem is temporary. So, if a borrower is able to convince that they can repay their debt albeit after a few months or so, then the bank may give a nod. However, the borrower usually has to pay a penalty for the same.

3. Settlement

The settlement is the last resort for every bank. If a bank has a reason to believe that the borrower won’t be able to repay the debt at all, at least for years, then they can exercise this option.

In this, the bank proposes that the borrower pays only a small portion of the total debt and be done with it. So, once the loan is “settled” in this manner, the borrower’s ledger is closed. However, this can greatly affect their credit score and make obtaining another loan a nightmare.

Most banks are fairly forgiving towards loan defaulters. However, they are a business after all, and if need be, they don’t hesitate to take stringent actions.