Understanding the Personal Loan Recovery Process

Ideally it is important to pay back loans on time as the repayment process impacts our credit report. However, in some situations, individuals cannot repay the loan on time. Under such circumstances the bank carries out a Personal Loan recovery process. This process follows certain rules from the bank and sends representatives to recover the remaining amount from the borrower. Read this blog to learn all about the bank loan recovery process and how to confidently proceed with it.

Understanding the loan recovery process

When personal loans are not repaid on time, the loan recovery process is inevitable. Personal Loans are very easy to secure, but if you do not pay them back on time with proper interest, it may become a problem with the bank and they will start recovering the money from the borrower by following the loan recovery procedure.

However, these loans are taken during emergencies. Still, the borrower must always choose the repayment tenure per the financial condition in the long run to avoid any delay in loan repayment and any legal steps in the future.

Guidelines for personal loan recovery from the RBI

RBI is the central bank of India, where all the rules for banking and its services are made. Here are the various examples so you can easily understand the various scenarios of the Personal Loan recovery process.

Example 1

When you are a valued bank customer and have a good reputation with them, however, due to some unforeseen situation, you lose your job or don't have enough money to repay the loan. These could be steps followed by the bank:

• They can extend your loan repayment tenure so you can pay your EMIs in a better way.
• Offer a moratorium, which means you don't have to start paying EMIs right after taking the loan. It's like a cooling-off period for a few months.

Example 2

When you have a low credit score, a negative credit history for loan repayments, and an unstable financial situation, these could be steps followed by the bank:

• You may not get an extended period to repay the loan.
• The bank can also sell the collateral that you kept with them when taking the loan.

When neither is the case, and nothing works out, the bank sends a recovery agent as a last resort to recover the loan amount.

Consequences of late repayment or non-repayment of loans

What if you do not repay the loan or are paying back the amount with a monthly delay? Here are the various key consequences you need to take into consideration always:

1. Penalty charges
   Banks may impose significant penalty charges on borrowers who fail to repay timely. These penalties can vary depending on the bank's policies and the type of loan. Penalty charges add to the debt burden, making it more challenging for the borrower to settle the loan.
2. Increased interest rates
   Banks may also increase the interest rate on the outstanding loan amount if repayments are delayed. This higher interest rate increases the cost of the loan, putting further financial strain on the borrower and making repayment more difficult over time.
3. Negative impact on credit score
   Late or missed loan repayments directly and detrimentally impact a borrower's credit score. A lower credit score from late payments can significantly hinder a borrower's ability to obtain future credit. This can affect everything from applying for new loans to securing a credit card.
4. Legal consequences
   Banks have the authority to take legal action against borrowers who default on their loans. This may involve sending legal notices to the defaulter urging them to settle the outstanding amount. Suppose the borrower fails to respond or make the necessary payments. In that case, the bank may proceed with recovery actions, involving recovery agents or filing a case with the Debt Recovery Tribunal (DRT).
5. Restrictions on future borrowing
   Borrowers with a history of late repayments or defaults often face significant challenges when securing new loans. Banks are usually cautious about lending to individuals with poor repayment histories, often resulting in rejections or approvals with higher interest rates and stricter conditions. This restriction on borrowing can limit financial opportunities, such as starting a business or purchasing a home.

Conclusion

When taking out a personal loan from a bank, always remember the loan recovery process that follows if the loan amount is not paid back on time. This especially holds true if you have a history of not paying back your loans on time. This could further delay your loan approvals in the future. So, to avoid these hassles, always repay your loan on time and have a healthy credit profile in the long run.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.