Loan default: Struggling to repay your loan? Understand borrower’s rights

Loan default: With digitalization, obtaining credit has become easier and faster, providing borrowers with convenient access to financial resources. However, this convenience has also led to an increase in loan defaults, which concerns lenders. Borrowers may find themselves in stressful situations, such as being unable to repay loans, especially with auto loans where vehicles may be seized. In order to ensure fairness, the Reserve Bank of India (RBI) has introduced a Fair Practices Code to protect the interests of borrowers. Despite defaulting, borrowers still possess legal rights that lenders are obligated to respect.

Rights of defaulting borrowers

1. Mayank Khera, co-founder & COO of Credgenics, emphasized that the Right to Notification prevents defaulting on loan repayment from being considered a criminal offense, except in cases of fraud, breach of trust, or as specified by the law. He further explained that when a borrower consistently misses EMI payments, the lender has the authority to systematically inform them. Typically, banks or financial institutions are required to give the borrower reasonable notice to fulfill their payment obligation. If the borrower still fails to meet the repayment deadline, the bank or lender can proceed with selling the asset after providing reasonable notice or as mandated by the law.
2. Khera further explains that defaulting on loan repayment isn't a criminal offense unless for fraud, breach of trust, or as per the law. “Borrowers are entitled to equitable treatment under the law, which serves as a safeguard against lenders resorting to unjust or misleading tactics when recovering defaulted auto loans. This ensures that borrowers are protected from any form of exploitation or abuse throughout the debt recovery process, fostering a climate of trust and integrity in financial transactions,” Khera explained.
3. When a borrower's vehicle is seized due to loan default, it's crucial to ensure a fair valuation of the assets. In many cases, the assessed value of the asset surpasses the repayment amount. "To maintain fairness, the Reserve Bank of India (RBI) has established guidelines to ensure equitable asset valuation processes, promoting transparency and fairness for all parties involved," said Mayank Khera.
4. If a borrower defaults and lenders try to repossess the vehicle, the borrower has the right to ensure that specific legal procedures are followed. “This includes lenders obtaining a court/arbitration tribunal order or complying with relevant repossession laws to protect the borrower's interests. Furthermore, borrowers can regain ownership of the vehicle by paying off the remaining loan balance, along with any repossession and storage fees, before the vehicle is sold,” added Mayank Khera.

It's essential for borrowers facing auto loan defaults to be aware of their rights and to seek legal advice if they believe their rights have been violated.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.