Can You Borrow New Money From Lenders After Defaulting On Loans?

There are various types of loans offered by banks and financial services providers such as housing loans, personal loans, auto loans, gold loans, unsecured debt, business loans, and even credit cards. These loans can be easily available in just a few clicks if you meet the criteria of the lenders. However, defaulting on these loans can have a significant impact on your credit score. In such a situation, can you apply for new loans and is it wise to do so?

Defaulting on a loan is when a borrower fails to make required equated monthly instalments (EMIs). Generally, lenders consider you as a defaulter after you fail to repay the minimum monthly amount for a certain period of time, specified in the agreement.

Is it wise to get a new loan after defaulting?

Pramod Kathuria, Founder and CEO of Easiloan recommended waiting for a substantial duration after defaulting on a loan before considering a new loan application.

During this waiting period, he said, "You can concentrate on enhancing your credit score by ensuring timely payments on any existing debts, reducing outstanding balances, and exhibiting responsible financial behaviour."

As your credit score steadily improves, lenders may become more receptive to your loan request," he added.

Once your credit score has improved, Kathuria said, "you may become eligible to reapply for a loan. Nevertheless, you might still encounter certain obstacles. Some lenders may exhibit reluctance in approving your loan application or may impose a higher interest rate."

Nevertheless, he added, "There will be numerous lenders willing to extend a loan, recognizing the improvements in your present income and your improved credit history established over time."

There isn't a fixed timeline for when you should re-apply for a loan, and it's not advisable to do so immediately after experiencing an improvement in your financial situation, he said.

Explaining further, the expert added that this caution is due to the fact that each loan application triggers a hard inquiry on your credit report, which can have a temporary negative impact on your credit score.

Finally, he said, "Accumulating too many hard inquiries within a short time frame can significantly lower your credit score. Therefore, it's prudent to exercise patience and apply for a new loan only when you have a genuine need for it."

Recently, RBI directed banks and financial institutions to put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs.

In respect of compromise settlements, the policy contains provisions relating to permissible sacrifice for various categories of exposures while arriving at the settlement amount, after prudently reckoning the current realisable value of security/collateral, where available. The methodology for arriving at the realisable value of the security shall also form part of the policy. The objective shall be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the lenders.

Also, compromise settlements where the time for payment of the agreed settlement amount exceeds three months shall be treated as restructuring as defined in terms of the Prudential framework on Resolution of Stressed Assets.

In respect of borrowers subject to compromise settlements, the cooling period in respect of exposures other than farm credit exposures shall be subject to a floor of 12 months, however, lenders are free to stipulate higher cooling periods in terms of their Board approved policies. This means that a wilful defaulter will be able to get a new loan after 12 months of executing the compromise settlement.