Learn How to Prevent Loan Defaults

A loan default can occur when the borrower is unable to repay the credit to the lender. In some cases, a loan default could also include the violation of the terms and conditions of the loan agreement between the borrower and the lender. If the borrower has violated any of these terms and conditions, he would be considered as the loan defaulter by the lending institution and the latter has the right to impose restrictions or demand full repayment of the loan or even charge additional interest.

The lending institution such as a bank or any other financial organization provides credite to the borrower on the basis of certain terms and conditions. For example, if a loan has been offered to a corporate agency, it becomes necessary condition, laid down by the bank that the agency has to maintain a certain level of capital amount. It the level is not maintained, the bank could possibly refer the borrowing agency as a defaulter and take action against it according to the agreement.

Loan default can happen in both secured as well as unsecured loan credit. In secured loans, the borrower usually mortgages his assets, either his house, plot of land or any other asset, which has a value in the market. If the borrower is unable to repay the loan he has taken against the property, the bank reserves the right to acquire the property and sell it off, as per the prevailing value of the property in the market. Under the loan defaulting terms and conditions, the bank could recover the credite extended to the borrowers from the selling of the assets of the borrower secured with the bank.

The bank while extending the secured loan to the borrower ensures that the latter surrenders the ownership documents of the assets to the bank. If it is a house or a land mortgaged to the bank, then, in that case, the borrower has to give up his title deeds to the bank against the credit received. The loan agreement clearly mentions that if the borrowers are unable to repay the credite, the bank reserves the right to sell their assets to recover the loan amount.

In unsecured loans, the lender also has the right to take hold of the assets of the borrower as per the agreement between the lender and the borrower. If an auto loan has been extended to the borrower and the borrower is unable to repay the amount, the lending institution can anytime seize the vehicle purchased from the loan. The bank can either retain the vehicle until the owner repays the full amount along with the interest or can sell it off to a third party if the same amount can be recovered.

Loan defaults keep happening depending upon the financial condition of the borrower. Although it is the responsibility of the lender to assess the repaying capacity of the borrower, in some cases, the defaults happen in an unexpected manner. If the borrower fails to pay even the single monthly installment on time, he can be considered as a loan defaulter and the bank can begin taking action against him immediately.

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