What Makes Individuals Default on Loans and Credit Cards?

What Makes Individuals Default on Loans and Credit Cards?

Last Updated : Oct. 30, 2020, 1:13 p.m.

Today, you can get a loan for buying even consumer durables, far away from the time when loans were for just a few things. Similarly, people are increasingly using credit cards for travelling and shopping. What’s more, they can get a loan against a credit card too. So, you are spoilt of credit choices these days as lenders are looking to expand their reach.

Even as choices are there, not everyone is living a smooth credit life. Some commit a default and face problems that follow. A default means failing to pay loan EMIs/credit card bills despite constant intimation from the lender. Not only the late payment charges mount, but you could also face legal complications (in the case of unsecured loans). Whereas, the non-payment of home loan EMIs for 6-7 months on a trot could make the lender seize your house and sell it to recover the money. So, the problem from credit defaults is massive both financially and mentally.

And if you are about to take credit, do not commit mistakes that potentially lead people to default later. Read further to know such mistakes.

Beware of Things That Lead One to Commit a Loan/Credit Card Default

A credit default arises mostly due to your ignorance or the mistakes you commit when taking credits. The sooner you understand that credit is an obligation that you need to fulfill without fail, the better your financial management will be. But deviating from this will mean the credit default is near and so are the problems that follow. Let’s check out the mistakes people commit, which lead them to default later.

Failing to Estimate Loan Requirements Properly

Many fail to estimate their funding needs properly and end up applying for much more. Some even get the loan amount they apply for as they meet the eligibility requirements. But what these people do not factor in is the contingency they may face later. And when they face the same, they commit a credit default. So, evaluate requirements by considering your present savings. It will help reduce the loan amount, keep obligations in check, and create a buffer for loan payment during contingency times should you witness the same.

Choosing the Loan at a Higher Rate of Interest

A loan when chosen at a higher rate of interest only raises your obligations. The monthly installment will notch up and so will the overall interest payment. In case you witness a sudden rise in your expenses, you won’t have that freedom to pay on time. And when the expenses sustain for long, default becomes a formality. So, we advise you to compare the interest rate of loans online and choose the lowest one. It will ensure affordable Equated Monthly Installments (EMIs) and keep your overall payment in check.

Going Haywire with Credit Card Transactions

A credit card gives us so much joy by offering rewards, discounts, cashback on purchases made with this cashless instrument. But in the lure of all these, many go haywire by spending beyond their ability to pay in full and on time. And therefore, they pay the due partially on a credit card and prevent a late payment fee. But doing so is not a solution as the higher interest rate of 36-40% per annum could well become the reason for default later. Given the perils involved, it would be better to spend wisely so that you can pay on time. The best part about credit cards is that the full payment on or before the due date will not lead to any interest payment.

When Burdened with Multiple Debts

Having more than one debt is quite common these days. While some have a personal loan and home loan together, others have credit cards in addition. With multiple debts, the possibility of you committing default in any one or more is quite high. So, if you have loans and a credit card too, be tight on the purchases you make with the cashless instrument. If possible, don’t do credit card purchases if you are left with zero to negligible savings post the payment of all these dues. Putting a halt to credit card transactions till the time your salary rises sufficiently will make sense.

Lack of Debt Management Plans

Often we live in the present and don’t think so much about the future. In a debt-free life, it can still be okay if not desirable. But when you have a loan or credit card, the lack of planning can lead one to commit a credit default later. Having debt management plans will help you counter any adversity you may face in the future. Saving from your routine is a step in that direction. But where you should save also matters.

Keeping money solely in a savings bank account won’t help you much. A savings account earns you interest at merely 3-4% per annum across most banks. So, put your money in fixed deposits and mutual funds too and increase it over the years. This way, you will have provisions for debt payment. You could even think of doing a balance transfer of loans at a lower rate. It will help reduce the EMI and overall interest payment.

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