Repayment of EMIs can sometimes be an uphill task. It may become all the more difficult during an unexpected job loss or a medical emergency. In such situations should one worry about defaulting on loans. Will a single missed payment affect one's credit life? How long does a default affect our CIBIL report? Let's find out!
Every time the borrower misses the payment due date, the lender or the credit card issuer reports this information to all the credit bureaus with which it is registered. This information stays on the credit report forever. Unlike in other coutries where it generally takes 7 years for such information to drop off your credit report, in India there is no such provision. The consequences of such negative information on your report aren't very good.
Your CIBIL score is calculated based on the information reported on the credit report. Payment history affects a significant part of your score. So the loan default information will have a serious negative effect on your credit score. When the bank does not receive payment by the due date, it follows up with the borrower by sending reminder emails and messages. If after a set time period it still does not receive the EMI it hires a recovery agent who may use several measures to get the money back. The recovery agents may follow you to your workplace and may even pressurize you to give in their demands. If things do not work still the bank may sell off its bad debt to another agency. For example if the borrower owed Rs 1 lakh, the bank may sell off the loan for Rs 50,000 to an agency thinking that receiving half the amount is better than nothing at all. The agency will now try to get the money and if it is successful it will earn profit. Each time the bad debt is sold to a different party a fresh default case is reported to CIBIL. Therefore a loan default may continue to haunt you for many years.
With this negative remark, it will be difficult to gain the trust of the lenders in case you need a home loan, education loan or a personal loan in future. So does that mean that a loan default closes doors to approvals of any future loans that you may require? No, not at all! Loan default isn’t the end of the world. If you negotiate with the collector and make a part payment of the loan it will be reflected as “Settled” in the CIBIL report. If the amount is fully paid the report reflects it as "Closed".
The current status of the default account affects the bank’s approval decisions. Every bank has its own policy to view the status of the default account. Some banks view the settled status negatively. You may approach the bank and offer to pay all the dues and penalties to get the account closed. A "Closed" status on the CIBIL report may help you fetch an approval. Talk to the bank about the plan that they will agree on to repay the past loan that you have defaulted on. Is there a way that default information does not enter the credit records at all? The best way is to talk to the lender about your financial situation and negotiate a restructured payment plan that is acceptable to both the parties. The bank should perceive your condition genuine enough to do the restructuring. You can ask for an extension of the loan tenure. This way the EMI amount will become smaller and easier to manage. Though the interest outgo will be more, it will at least bring some immediate relief and remove pressure on your funds. Alternatively, you can seek a temporary relief of a few months by deferring the loan payment. So never run away from problems to wait till they become very bad. It is best to take a proactive approach and find a solution to the problem.
Whichever way you look at it, getting rid of default on your CIBIL report is a process. So, roll up your sleeves and get ready for the long haul!