What should you do in the event of a car loan default

When the economy slumps unemployment percentages, grim job prospects, and high inflation rates can rock any individual's boat. Those who once had a great credit score and made payment of bills on time could now face the fear of defaulting on their loans. 

Probably the next big thing on your monthly budgets after the mortgage loan is the car loan. And you would not want to default on this for obvious reasons. One, it will destroy your credit history and two you might lose your car to the repo man! 

But when does a default actually happen? Does making a deferred or skipping the payment for a month or so constitute a default? Will your car be repossessed then?

When does a default happen?

Technically, a car loan default happens when a customer repeatedly fails to make the agreed car loan payments to the lender/bank that lent the money for its purchase. But is there a prescribed number of payment failure mentioned? 

Yes. Usually, the car loan agreement that you signed with your lender/bank will have these terms clearly spelt out. Everything about your car loan, your loan repayment obligations and when you are in default are usually explained here. The agreement may also provide the risks involved and the possible solutions in case of a default. 

Though the term 'default' has no universal definition to it and differs from case to case, the general meaning of 'default' is if you are 30, 60 or 90 days late on not making one or more payments. Having said this it is vital to know what you should be doing when you wake up to the fact that you might have big difficulties in making your car loan payment for the month and avoid being tagged a customer at 'default.'

What should you do in the event of default?

The problem starts when you fear the inability for the car loan payment start to avoid the lender/bank. Never do this. Most lenders/banks will work with payment issues on a case to case basis. So the moment you see trouble in making your car loan payment, call up your lender/bank and be honest to explain the reason for the delay in payment. They might have heard the excuse a thousand times before but being straightforward could work in your favor and bring about a mutually beneficial adjusted term.

Apart from this, there are many other options available to you. Don't give up on your car until you try all of these.

1. Try to talk to your lender/bank to extend your car loan duration. For instance, if you had originally taken a car loan for 36 months you could request it to be extended to 48 months. This will ensure your monthly commitment is reduced.

2. Ask your lender/bank if he would consider allowing you to make a deferred payment. It means you will be allowed to skip the current month's payment and make it at a later date. Explain to him that having a month's jump on the payment will give you the much needed flexibility. 

3. See if you could convince your lender/bank to change the payment due date permanently.

4. Late charges are often levied on your late payments. If you feel that these accumulated late charges is actually straining you from making a timely payment, ask your lender/bank to waive these fees. If it would help you make a timely payment, the lender/bank might agree.

What if none of the above options works out?

As said if the payments are not made as said in your agreement, it is deemed as default. The obvious fallout of this is the lender/bank might repossess your car. Depending on your loan agreement, the lender/bank will send you a written notice of default asking you to make the remaining balance on your car loan or face repossession. If the notice is not honored within the time mentioned in it, your car will be repossessed.

What do banks do with such cars? How do they get their money back?

As said, a repossessed car is often sold at an auction to pay off your default loan amount. The auction details are well advertised and done in a commercially reasonable manner. Usually, the lender/bank informs you or the customer at default about the place and timing of the auction so that if you want to bid or just see how the auction goes you can do so.

Your troubles might not end when the repossessed car is sold off at an auction! There could be other serious fallouts of this default for you. Your credit record will take a beating and if it does you might not be in a position to avail any new loans for the next 7 years. This might force you to get into the bad credit market where the interest rates are ominously high! 

Next, you might face a default judgment. A default is the difference between the value of the car at the time the lender/bank sells it and the actual outstanding loan balance that you owe on the car loan. For instance, if you owe Rs. 4, 00, 000 to the lender/bank at the time of repossessing but the car only sells for Rs. 3, 00, 000, you will have to pay the difference of Rs. 1, 00, 000 to the lender/bank. If not, the lender/bank could move the court to claim it.

On the flip side if the car is sold off at a higher price than the money owed by you to the lender/bank, you will be reimbursed with the surplus amount.

Can a regular buyer with funds purchase a repossessed car at a discount price?

Certainly! Repossessed cars are often sold at a discount price for obvious reasons, mostly because it is technically not a new car and up for only a resale. As said, repossessed cars are sold at auction which is advertised. So if you are interested in buying repossessed cars then you can refer to these adverts or also call auction houses or local lenders/banks that repossess cars or local used car dealers. In some cases you can buy the repossessed cars online as some small lenders do it online.

All information including the preferred payment mode, the correct form to be filled etc are usually available in the adverts or the lenders/banks, auction houses or local used car dealers or at the place where the auction takes place. 

It is advisable to examine the repossessed car before buying it. You can take the help of someone like a car expert for this. It is also better to look at the vehicle history report, if it is available. A thorough check of the car interiors for defects and if possible taking a test drive will go a long way in ensuring that you buy a car in good condition.

Don’t borrow to invest

Initial public offers, gold, infrastructure bonds… investors never had it better. Consider for example: Coal India’s public issue, which saw a phenomenal response from investors, is expected to list at least 20-25% premium over the issue price when it gets listed on the stock exchanges today.

The IPO market is buzzing with frenetic action with several real estate developers and infrastructure companies including Lodha Developers, Neptune and Reliance Infratel slated to hit the market soon. As for gold which has been defying gravity for sometime now, less said the better.

If deep pockets are spoilt for choice, empty coffers have no cause for complaint either. For example, those who are eyeing the IPO space with no money to spare have received loan offers from banks and non-banking finance companies (NBFCs). Public sector banks are offering women loans to buy gold. Private sector banks and credit card companies are also luring buyers with offers to convert their gold coin or jewellery purchases into equated monthly installments (EMIs) that can be paid off via credit cards. Several banks are offering 3-9-month EMI schemes for buying gold coins this festive season.

But hold on a second. Common sense says you should invest with your surplus money, right? Borrowing to invest? Is it such a smart move? For example, what happens if the IPO that you have invested in lists at a huge discount to the issue price. It’s a double whammy. You have to bear the interest cost plus the losses. The same holds true for gold which does not look to be in a hurry to come off the highs that it’s currently riding on.

“A high net worth individual can earn some money by borrowing if he already has money parked in, say, a liquid fund. He can pull it out for down payment and borrow the rest of the money for 10-12 days, which will come at around 15-20% interest. The chances of allotment increase in case you take IPO financing as you are bidding for a higher allotment,” says Manish Bandi, vice-president, India Infoline .

In short, you will have to shell out half the money required for investing in an IPO from your own bank account and the balance amount will be funded by the bank or non-banking finance company. The interest charged is 21% in some cases.

And, mind you, it is not 21% per annum, but 21% for the 10-12 day period. This means that if you have taken a loan to invest in an IPO, priced at Rs 100 a share, you will have to make at least Rs 125 to just recover the cost of funding, including the processing charge. “There is always a chance that the listing gains may not give you good returns. In that case you will have to hold,” says Mr Bandi.

That really is the problem. What if everything doesn’t work according to plan? If the IPO fails to list at a premium, you will land in a soup. First, you have to repay the loan you have taken from the bank or NBFC within 10 to 30 days of taking it. So, what will you do? Sell the stock and return the money and bear the loss with a grin?

Even with a happy ending (read listing), the leveraging can cap your profits. Obviously, if you borrow at a higher rate to invest, then even at a phenomenal return, your profits will be affected. “The cost of funds should not be too high because even if the IPO gets subscribed heavily and the listing gains are higher, your cost per share will also be very high,” says Mr Bandi.

This is what happened in the case of a stock trader. “We had this gentleman who has been investing in shares. He borrowed Rs 30 lakh to invest in the share market. Soon after, the market collapsed. He was not employed anywhere and was surviving solely on this trading income from the share market,” recounts VN Kulkarni, chief counsellor at Abhay Credit Counselling Centre. “We told him that if you had a regular income, we could have still requested the bank to alter the EMI, but you don’t have any regular stream of income. The bitter lesson: Do some calculations about how you are going to pay back the loan. You shouldn’t enter waters that you don’t know about.”

The interest will also increase the losses incurred. “Investors should be aware that the loan taken for making investments will have to be serviced, in terms of interest and repayment, irrespective of the outcome of the investment,” says an Axis Bank spokesperson. “The amount of loss will increase by the amount of interest that is payable on the loan.

Also, if the loan tenure and investment tenure do not match, the investment may have to be liquidated at an inopportune time to repay the loan and this may result in a loss on the investment,” he adds. Add to that a penalty in terms of added interest rate. Some banks charge a penal interest of 2% per annum over and above the rate of interest on the loan outstanding in case of late payment.

Same is the case with the loans offered on credit cards to purchase gold coins or jewellery that is offered at “0% interest”. To begin with, the jeweller will offer the same jewellery at a different price, depending on the mode of payment as there is a transaction charge and processing fee attached to these schemes. In case there is no processing fee, check the tenure of the loan. For example, there are schemes where the processing fee and interest is 0% only if loan on credit card is repaid within three months as EMI. If you opt for an EMI of six months, then the interest rate is 0.99%, while the processing fee is Rs 70 for every Rs 1,000 of the loan amount. This processing fee also adds to your cost of purchase.

“People should see the processing fee. The cost of goods under the scheme and without the scheme should remain the same,” says a former credit card head with a multinational bank. “After the interest- free period, check whether the card company charges the interest from the first day. For example, if you don’t pay the third EMI, the bank will charge the interest for three months – starting from the day you took the loan. Most schemes charge the credit card interest rate on the entire (original) amount outstanding, which may be as high as 42% per annum,” he says.

Before taking up the credit card offer, “you should see the rate of interest, the capacity to pay back as, in case of default, it will reflect in your credit history,” says Kulkarni. But he adds that if you are building an asset and using finance for it, then the idea is good. “Borrowing to purchase a gold coin is fine as there is an asset that you are getting by paying the loan in instalments. You are investing in something where the price will not immediately crash and you may not be having that kind of money to purchase gold.”

Source: Economic Times

Beware of zero percent finance schemes

Having remained in a lull for some time, zero percent finance schemes are back with a bang.

And consumers looking to buy consumer goods on easy monthly installments seem to be a happy lot today.

After all, where else can they find a chance to stagger their payment without paying any interest on the loan amount?

However, before going overboard, you need to know the real cost of such schemes and also how these schemes work.

“Zero percent finance schemes are quite popular with consumers, and companies use them in an efficient way to attract customers to make purchases, especially for consumer durables, during the festive season,” says Anil Sahgal, founder of financial advisory portal ‘i-save’ .

He says the festive season is a critical sales period for most consumer durable companies and the zero percent schemes play an important role in effective sales promotions .

Since most customers do not understand the total cost of the scheme, they happily go for it as it seems like a genuine discount.

“You should, however, always remember that there is no free lunch in life. Similarly, zero interest is nothing but higher discounts that the company or manufacturer offers to the bank or the lender or the financier who in turn passes it on to the end buyer,” says Lokesh Nathany, head of sales & distribution, Motilal Oswal Asset Management . The schemes offer a ‘zero percent’ finance, where a customer typically pays for the financing cost in an indirect manner. The indirect cost will include, for example, paying a processing fee and a significant amount as advance EMIs in addition to the minimum cash down payment. The biggest cost, however, is forfeiting a cash discount which might be available on a cash purchase.

For instance, suppose Nand Gopal wants to buy an LCD TV for Rs 36,000. At a major retail store, there is a cash discount of Rs 2,000 available on the LCD. However , Gopal does not wish to pay the whole amount cash down. To avail of the scheme, Gopal will need to pay a processing fee of about Rs 1,000 to the NBFC. He will also have to forfeit the cash discount of Rs 2,000 since the discount is not available on a finance deal. Now, on a loan of twelve months, Gopal will have to pay four EMIs in advance, ie, 36,000 / 12 X 4 = Rs 12,000. So, effectively Gopal has got a loan for Rs 24,000 only. His total cost of taking the loan was Rs 3,000 (processing fee + forfeiting the cash discount). So for eight months, Gopal paid Rs 3,000 on a loan of Rs 24,000, paying an effective interest rate of 18.75% annualised. So, buyers who can afford to buy with their own resources should not get lured by such schemes simply because they appear attractive.

However, if you must go in for a zero finance scheme, you need to take some precautions.

For instance, “you must check the amount of processing fee to be paid besides checking the advance EMIs required. Also, compare the total cost of the zero finance scheme with the interest cost if any other loan was taken to finance your purchase.

Customers must be aware of the details of the scheme and make an effort to compare these with other options for borrowing,” says Mr Sahgal.

Source: Economic Times