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Reasons why you should not default on a home loan

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Home loans are often long-term commitments and involve a huge sum of money that a lending institution gives to a borrower.

Due to unforeseen circumstances or financial commitments, borrowers may not be able to pay one or more of the equated monthly instalments (EMIs).

Jairam Sridharan, MD, Piramal Capital and Housing Finance, points out, “Lenders do not like such surprises and in such a scenario, it is ideal to keep the lender informed about the situation beforehand.” 

Even though some leniency may likely be exercised for a single default, experts say, multiple defaults may have far-reaching consequences, both from a financial and reputation standpoint.

  1. Credit score: A borrower’s credit score often takes a dive when a home loan default happens. Since credit scores are a crucial component of deriving an individual’s home loan eligibility, such default can make it very difficult to get another home loan or any other loan.
  1. Impact on co-applicants: The impact of a default on a loan often extends to the co-applicants in such a loan and does not remain limited to the primary applicant. “A low credit score brought on by a loan default can also make it tough for an individual to get proper employment or even a rented accommodation,” adds Sridharan. 
  1. Delay Penalty Charges: Borrowers often overlook other home loan charges while choosing the cheapest home loan available. An important fine print, Sridharan says, “is the late payment charges, which means the borrower is required to pay a penalty whenever they do not pay the EMI on time. The charges vary between lenders and thus, it is essential to check the same when applying for a loan.”
  1. Top-up and other loans – As a borrower, maintaining a healthy EMI payment record is important for you, as then you can opt for various types of different top-up loans such, as personal loans, contingencies, home construction loans, home renovation, improvement and extension loan in the future. A default can make it difficult to avail of any top-up loan facilities.

In the long run, experts say a home loan default may lead to a situation where the borrower faces financial losses, unemployment, erosion of financial security and creditworthiness. 

“If a borrower is aware of any event that may risk a default, they should speak to the lender about the current situation. The lender may in-turn may allow a moratorium of a few months to clear the dues or restructure the loan by increasing the tenor which could lower the EMI amount,” explains Sridharan. 

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