Defaulting on a loan against property: What every borrower should know

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Arrears on payments on a property-secured loan can trigger harsh consequences other than simple late fees. Since the loan is secured by your home or other real property, your lender has effective remedies in law at hand to enforce payment if you default. Understanding how this is done, and what remedy is available to you, is valuable to protect both your financial interests and your property.

What is default

Default occurs if you default on your equated monthly instalments (EMIs) that are timed. One or two defaults may attract only fines, while frequent default leads to escalation. Lenders will mark a loan account as a non-performing asset (NPA) in case dues are not paid within 90 days or more. This is where they gain the authority to initiate recovery proceedings under Indian law.

Damage to credit score

The first direct consequence of defaulted repayments is on your credit report. Each default EMI gets reflected on credit bureaus like CIBIL or Experian, and one default can significantly lower your score. A bad score reduces the likelihood of getting other credit facilities like personal loans, auto loans, or even credit cards at a later date. Even defaulters can obtain loans, but then at very high interest rates.

Lender's right to recover

As the loan against property is secured, the lenders have a direct route for recovery. Banks and financial institutions covered under SARFAESI Act can issue you notice of recovery. If defaults are not settled within 60 days, they can take possession of the property, auction it by public sale, and recover their dues. Interestingly, this does not entail long litigation, thus recovery can be carried out at speed once default is proven.

Loss of residence

The gravest risk of default is the risk of loss of the security property. In most cases, this would be a borrower's home or a prized family asset. Loss of property not only leads to financial insecurity but also psychological distress to the borrower and his family members. Even if the selling price at the auction is greater than the dues, loss of property may create indelible scars.

Alternatives available to borrowers

While default is something serious, borrowers aren't left without options if they come in early. For starters, open communication with the lender—most banks will restructure loans, roll over tenors, or provide temporary moratoriums if repayment capacity is under stress. Alternatively, there's refinancing, where a new lender pays off the original loan and extends a new one at better terms. For those facing only temporary cash flow issues, even symbolic payments will make a demonstration of willingness to pay and reduce the prospect of drastic action.

The takeaway

Defaulting on a loan against property is more than a missed payment—it can result in losing your home, damaging your credit history, and limiting future financial flexibility. However, proactive engagement with your lender, careful budgeting, and exploring alternatives like refinancing can prevent matters from spiralling into legal recovery. Protecting your asset and financial stability depends on acting decisively before default becomes unmanageable.

FAQs

Q1. How long is the time limit before the bank confiscates my property?

Lenders usually have to serve you a 60-day notice under the SARFAESI Act, during which time you can settle dues and prevent further proceedings.

Q2. Can I get back my property once it's confiscated?

Yes. If you settle all outstanding dues, interest, and penalties before the auction sale is completed, you can get back possession of your property.

Q3. Will defaulting only hurt this loan?

No. A default will lower your overall credit score, making it harder and more expensive to borrow in the future.