While loans are a great way to pay for important commodities that you might not be accessible to you otherwise, if not handled properly, they can have a negative impact on your finances. There are a number of reasons you might not be able to make the payments on your loan.
In the event that you are unable to make the loan EMI payments and fail to reach an agreement with the bank, you will be marked as a defaulter. If this happens, you not only lose ownership of the collateral, but your credit score will also take a hit.
What is Credit Score and Why is it Important?
Your credit score is a number between 300 and 900 that tells potential lenders how creditworthy you are. If your credit score is low, your loan application will likely be rejected by the bank.
Credit scores are tracked by an organisation called CIBIL (Credit Information Bureau India Limited). Banks send regular reports to CIBIL detailing the credit and loan statuses of their customers. If you default on a loan, your credit score is negatively affected and this affects your eligibility for a loan. Most banks these days only approve loans for applicants whose credit scores are at least 750.
Any lower, and you’ll have a hard time finding a bank that will approve you for a loan. Need a home loan so you can purchase your dream home? You need a good credit score, or banks will outright reject your application. If you’re in the market for a Home Loan and have a good credit score.
How Does a Loan Default Affect Credit Score?
Defaulting on a loan will damage your credit score and lower it, making it hard for you to secure loans in the future.
So, how long does a loan default stay on your credit report? Information about loan defaults stays on your credit score for a period of 7 years, during which you will have to make an effort to rebuild your score and show banks that you are a trustworthy borrower.
How to Fix Your Credit Score after Loan Default?
There are no quick fixes for a credit score that has taken a beating. You’ll have to build it again over time, slowly, and with consistently good financial planning.
Some measures you can take to improve your credit score include making an effort to pay off the loan that you defaulted on; applying for a credit card and using it responsibly, to show that you can be trusted to make payments on time; keeping up with all your loan payments also serves the same purpose and will improve your credit score over time.
Another important thing to keep in mind is that you should always have more secured loans, like home loans and gold loans, than unsecured loans like personal loans.
Bajaj Finserv offers Gold Loans between INR 25,000 and INR 10 lakhs with no prepayment charges and a full repayment option.
How to Handle Loan Default?
Avoid defaulting on your loans as far as possible, but if you fear that you won’t be able to make your EMI payments on time, communicate with your bank and they will most likely be willing to come to a compromise. Not talking to your bank is the worst thing you can do when you’re in a bad financial situation, because you won’t be aware of what measures they’re taking. You would also miss out on the opportunity to negotiate with the bank and come to a compromise that would have a lesser impact on your credit score. You can apply for your Home Loan online, with Bajaj Finserv, right now by clicking here.