11 Apr 2014

Rupeepower Editorial Team

Driven to Default? The Mechanics and Consequence of Car Loan Default

Defaulting on car loans is perhaps the last thing on the mind of the owner; but given the interest rate hikes in the last one year banks have witnessed increased cases of loan defaulters. Banks thus have become cautious in offering loans for commerical vehicles and they no longer judge the credibility of a loan seeker merely based on the account balance. Speaking strictly from a customers perspective, there may be a number of reasons- ranging from a job loss to being entangled in debt trap owing to a number of comitments, as to why default becomes imminent. Technically a default occurs when a customer fails to make the repayment to the lender as per schedule outlined by the lender at the time of giving the loan. There are serious fallouts – the credit record takes a beating and it would become difficult to avail loans in the future.
However defaulting on a car loan is not necessarily the end of the road. Financial institutions do understand the fact that there could be genuine reasons as to why the borrower is not able to make the timely repayments. The borrower depending upon his intent and genuiness of the case can certainly engage the lender to look inot mutually acceptable feasible options. There are a number of options available which can be worth trying:
• Debt rescheduling: One can certainly speak to the lender to extend the duration of the car loan. If the lender (after analysing the financial position) is convinced that it is the quantam of EMI that is the reason behind the default, may reschedule the debt by extending the loan tenure which will effectively bring down the EMI commitment. Once the financial position of the borrower improves, he/she can renogotiate with the lender to revert to higher EMI.
• Deferring the payment: The lender can be requested to allow for a deferred payment (allowing the borrower to skip the current month’s payment and allowing it be paid at a later date) thereby giving the much needed flexibility. The lender may possibly permit the same but at the same time may charge a penalty on not paying the EMI on the previously agreed upon time.
• Waive off the late charges: On a case to case basis and depending on the past records of the borrower, the lender may agree to waive off the penalty .

Despite all these efforts, the borrower may fail to convince the lender and hence the agreement is deemed as default. The obvious fallout in such a scenario is that the lender bank will repossess the borrowers car. Depending on the loan agreement the following are the possible turn of events:
• Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. In case of non payment within this notice period, the Bank will repossess the pledged vehicle..
• After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a time line of 7 days to make payment of the outstanding dues. The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of vehicle.
• In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realization of the payment.
• The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.
The obvious question is what do banks do with cars they repossess from the borrowers and how do they get their money back. Generally the repossessed car is often sold at an auction to pay off the default loan amount. The auction details are well advertised and done in a commercially reasonable manner. Usually, the lender/bank informs the customer at default about the place and timing of the auction so that if the borrower wants to bid or just see how the auction goes . As the repossessed cars are sold at auctions which are advertised well in advance, a regular car buyer with funds can purchase a repossessed car at a discount price. Having said this it is always better to check the history report of the vehicle.

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