Loan Default? Must Know Borrower’s Rights That Will be Useful

Defaulting on loan payments is very serious as it can have a lasting impact on your finances. This is because consistent non-payment of a loan can lead to legal repercussions. Thankfully, there are a few borrower’s rights to help you navigate this situation. 

In such a situation it is critical to know the rights that all lenders must adhere to. These rights are: 

• For the protection of your dignity
• To avoid any unnecessary stress in a financially difficult situation
• To provide an opportunity for recourse

Read on for insights into your rights and tips to avoid defaulting. 

Borrower’s Right in Case of Loan Defaults

Here are all the rights of a borrower in a loan contract that you must know. 

Right to Notice

It is your right as a borrower to receive a formal notice from the lender. This must come before taking any action, such as 

• Putting a lien on your account 
• Auctioning your asset for recovery 
• Opting for legal action

The SARFAESI Act clearly outlines that lenders must: 

• Issue a 60-day notice before taking any action
• Giving you the time to arrange for funds

The account must also get declared as NPA (Non-Performing Asset) to warrant issuance of a notice. This classification only happens when the repayment is overdue by 90 days.

Right to be Heard

If the lender has issued a notice, you have the right to be heard about your objections to the notice and make a case to the officer. Lenders must reply within seven days and provide valid reasons if they reject your objections.  

Right to Civil Treatment

Often, lenders hire recovery agents to reach out to borrowers for payments. In such cases, the lender and recovery agent must be civil with you. This includes ensuring that they contact or visit you at a place decided by you or your work/home if there is no specification. 

They must also contact within reasonable hours, which is between 7 AM and 7 PM. Lastly, they must give you fair treatment. This means that in a bid to get payments, lenders and recovery agents aren’t allowed to: 

• Intimidate
• Harass
• Threaten

Right to Fair Valuation of Assets

Lenders can recover their loan amount for secured loans by auctioning the pledged collateral. In such cases, you, as the borrower, have the right to ensure that the assets are being priced fairly. You can also object if the asset is being undervalued.

Right to Claim the Balance

In case the lender auctions your asset, you have the right to claim the additional amount after debt settlement. This is a likely scenario if the pledged collateral was a property or any appreciating asset like gold. So, the lender must deposit any surplus amount, after deducting the outstanding amount, into your account. 

How to Avoid Loan Defaults

To avoid all the hassle that comes with loan default, you can follow these tips: 

• Make a budget to reduce your unnecessary expenses
• Automate payments or use reminders to make timely payments
• Build an emergency fund to avoid defaults
• Reduce your debt by opting for foreclosure
• Use your bonus and increments toward repayment
• Avoid applying for too many loans at the same time

Much like the rights of a buyer, borrower’s also have certain rights, even if they default on payments. Knowing about these will help you manage your loan better and handle such problems if they arise. Alternatively, you can opt to consolidate your debt and avoid defaults altogether. For this or any other reason, you can apply for the Fibe Instant Online Personal Loan. 

You can easily secure up to ₹5 lakhs with a smooth digital application process and speedy approval. With an affordable interest rate starting at 2% per month and a flexible tenure option of up to 36 months, you can get affordable EMIs. Download the Fibe Personal Loan App or go to our website to apply now.

FAQs on Borrower’s Right in Case of Default

What are the rights of a defaulter on a loan?

Here is a quick overview of the borrower’s rights in case of default:

• Right to notice: You should get a 60-day notice before lenders can take any action
• Right to be heard: You can object to the notice issued, and lenders have to respond within 7 days
• Right to fair treatment: The recovery process must be civil, with no intimidation, harassment, or threats
• Right to fair valuation of assets: The collateral pledged must be valued fairly 
• Right to claim the balance: Any surplus balance after liquidating your asset must be given to you

How do you deal with a loan defaulter?

This varies depending on the lender, their policies, and rules and regulations. That said, here’s what lenders generally do in case of default: 

• Send reminders to pay the first three EMIs
• Send a legal notice after 90 days or another specified period from the first missed EMI
• If this doesn’t lead to a solution, they can employ a recovery agent to recover the dues
• After this, the next option is a negotiation and restructuring of the loan 
• Lenders can take the matter to court as a last resort

What are the new RBI rules for defaulters?

Reserve Bank of India has laid down some regulations for lenders in case of default. These are as follows:

• Lenders must ensure fair practice of debt recovery without embarrassing or harassing the defaulter
• Lenders must issue a warning notice to the defaulter before taking legal action
• RBI encourages lenders to allow defaulters to restructure their loans or provide a moratorium period to reduce the stress

What are the legal rights of a loan borrower in India?

Legally, in case of default, you must receive a notice before any action is taken. You can also object to the notice, and must receive fair and polite treatment. In the case of a secured loan, they have the right to know the fair value of their asset and claim the surplus amount, if liquidated.