Defining an auto loan?
An auto loan is a loan that person takes out to purchase a motor vehicle. These loans are structured into instalments based on the value of the vehicle purchased.
Defining Secured loans?
An auto loan is a type of secured loan, where the borrower must keep a valuable item as a collateral. This valuable item is taken in possession by the lender when the borrower is unable to repay the loan. In the case of auto loans, the object in collateral is the vehicle itself.
Are secured loans risky?
Secured loans are relatively less risky than unsecured loans, mainly because of the collateral element. These loans have lower interest rates compared to unsecured loans. However, a borrower’s creditworthiness is evaluated through their credit score before sanctioning the loan.
Consequences of Defaulting a loan repayment
- Late payment fees and penalties – If you are late in paying your EMI, a hefty amount can be charged as your late fee in some cases the interest amount might be inflated due to penalties.
- Debt Goes to Collections – The lender typically waits for a period of 30 days, during which they try to contact you via phone calls, letters etc. When there’s no response achieved you debt is sent to collections; this is then taken over by an agency who will then ensure to collect the money. This process drops your credit score and lenders charge risk premium on your borrowing.
- Drop in credit score – Defaulting a loan will severely affect your credit score, which will drop your credibility for borrowing, making you unworthy of loans or other credits.
Consequences of Defaulting a Secured loan repayment
- Repossession of collateral – If the borrower defaults on a secured loan, the lender has the right to take possession of your collateral as per your agreement. Failure to repay loan on a car or two-wheeler results in a 7-15 days’ notice period to settle your dues, before the lender seizes your vehicle.
- Auction/Resell your collateral – Post repossession of the collateral the bank/lender has the rights to either resell or auction against the property. The sale of the vehicle is notified to the borrower in advance if the sale exceeds the loan amount, the balance is given to the borrower. In case of a two-wheeler or car the lender gives a grace period of 7 days to settle the dues, after which the vehicle is put up for sale within 90 days.
Tips to Avoid a Loan Default?
- Prepare a budget- Preparing a budget and keeping track of your expenses can help you pay your monthly equated instalments (EMI) without fail.
- Build a contingency fund: consistently deposit money into a reserve for emergency situations. This reserve will help you pay off your EMIs and keep your credit score afloat.
- Evaluate your asset: If you believe that you will not be able to repay your loan, it would be better to assess your situation and sell off your asset. The proceedings of which can help you pay off your EMI.
- Negotiate with your lender: In a situation where you are unable to pay your debt, it would be a better option to negotiate with your lender. The lender would rather have your loan repaid than the vehicle itself.
