sme loan

This article has been written by Sekhar Rai pursuing Certificate Course in Real Estate Laws and has been edited by Oishika Banerji (Team Lawsikho). 

This article has been published by Sneha Mahawar.​​

Introduction 

This article has been written to give a perspective about the repercussions of availing a home loan with the intent that the readers make a wise choice when they do so. In India, around 80% of residential real estate projects are acquired by home loan. This particular data standalone sums up the importance to be aware about the choice you will make and making sure you don’t miss out on weighing all the pros and cons to make a decision ideal for you and your most precious asset, your family.

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An emotional purchase 

There’s nothing wrong with purchasing anything which makes you feel strong emotions, it could be your first car, first trip, first gift from your own hard-earned money. However, as rightly stated by wise men, you cannot let your feelings cloud your judgment, they might end up making you experience emotions you didn’t wish for.

A sense of obligation is felt at a social as well as at a personal level, to own a roof in your name. This obligation often works as a catalyst that persuades your mind to avail the loan when you might not or in fact is not ready for it. Another feeling is that of uncertainty, the second most precious asset to your life is peace, people want to settle at a place that gives them a sense of peace because they don’t have to think about the anxiety of moving out to another place, do all their due diligence, legal work, rent agreements, search for a place accordance to the finances, and tons of factor to consider while moving into a new place, again and again like a cycle.

It’s absolutely okay to feel these emotions, we all are human, but again the principle question is are we clouding our judgment? Are we depending solely on emotions to make a decision that will greatly impact not just ours but the lives of people we hold dearest in our life? After all, a house is just a house until a family makes it a home.

Investment angel in the unforeseeable future   

There is this phenomenon that is commonly shared with the other precious aspects of life such as health, relationship, growth and success, that is, a long time commitment which is also the cardinal factor you should consider before availing a home loan.

Let’s face it, the usual timeline for a loan ranging around 30-75 lakhs can last up to 10-30 years.

Welcome to the era of unpredictability, layoffs and modernisation, there is no telling where your life will take you to in the next phase, both in a negative as well as in a positive way.  Consider a situation, where you are getting an opportunity in a new city, you may feel influenced because you have to pay heavy EMI’s and that would be getting a major chunk of your money and hence increasing the chances of dropping the idea to move out, you need to understand what you missed here, your growth.

The next is the investment angle, if you are paying a major portion of your monthly salary in the repayment of your debt, you would be missing out to invest in equity, shares, stocks, funds and alike which would further give you long-term valuable returns, those returns can give you access to execute your ideas which can open up a world of opportunities for you, you again need to understand what you paid alongside the equated monthly installments, you paid the cost of opportunity lost.  

If you contemplate through the lens of asset and liability, the home loan is a liability, and understanding each and every aspect is important so that this liability doesn’t come in the way of a potential asset in the future, we would be now discussing these angles in a much broader and at an important level, that is, the impact it can create to the development and steadiness of a family.

Risk of financial turmoil in light of family planning 

Raising a child is already financially stressful and with the coming times, everything is going to increase only, providing proper education, health and growth are the primary concern of parents. Not only birth but there can be several instances where your life can be turned upside down, an event is all that it takes.

Fulfilling the primary requirements is not the end of the goal, no one wishes for that, everyone wants to live a life not just of necessity but of desires and fulfillment of wishes which gives them satisfaction.

Another dent that you might be experiencing could be hindering the growth of not just yours but the most precious asset of your life, your family. For instance, you may compromise that extra music classes your child wishes to join, or some wishes you thought would bring joy to your loved ones. However, the monthly EMI has already taken a good share of your finances and you might feel compelled under such situations, satisfaction is costly and you need to pick what investment will give you one.

In case of defaults, things can be much worse, you would be getting a low CIBIL score that would carry a risk of future loans getting rejected, the loan could be an educational loan, a car loan, or any such loan that would be highly impacting your lifestyle which brings us to the next point of our discussion, legal consequences. 

Legal and other consequences in case of default payment  

In such unforeseeable times, if you do not have a well-structured and planned mannerism of the repayment of your home loan, chances are high that you may end up dealing with some legal as well as financially stressful times. Let us now contemplate the cardinal consequences of the default, to begin with, home loans are secured loans.  However, in case of defaults to pay the EMI the bank will term it as a Non-Performing Asset (NPA) which is known as a non-performing asset. It is the third consecutive default in a row that will make the bank declare so, this also enables the lender to initiate legal actions against the borrower under the provisions of the SARFAESI ACT, 2002. Under this enactment, a legal notice is sent to the borrower to repay and in case of further defaults, the property will be auctioned at the mentioned date. If you do not settle your dues within 90 days of your last payment, your lending institution classifies your loan as an NPA and sends you a legal notice with a period to settle down the issues within one month. If you do not pay at this point, your lender will notify you that your property will be auctioned to recoup unpaid debts.

The next dent is the penal interests and amounts which are to be given in times of default, in a simpler sense these can add up to a lot in the end and will negatively impact your financial liberty making your expenses worse.

Further, a loan is not only taken to build a home but to achieve one’s goals and attain a healthy lifestyle and for that CIBIL comes into the picture. Your CIBIL takes a hit, reduces the point, attains negative remarks which are visible in the credit report that resulting in decreasing your creditworthiness which eventually ends up reducing your chances of availing future loans, be it for the education of your child, finances needed to recover from serious illness, an uncertain event etc that would literally change your world upside down, after all the asset of reputation is the most difficult to revive.

This doesn’t end here, you lose out to another opportunity that would have eased out your financial stress by lowering the EMI burdens and that is home loan transfers. For those of you who don’t know this, home loan transfers is a tool that you can use to get a new lender who pays the outstanding amount of the loan to your former lender and henceforth, the liability is shifted to repay the loan to your new lender, borrowers do so to get better interest rates but,  since you are classified as high risk from the perspective of banks, it gets way difficult to get one.

Conclusion  

This article does not intend to discourage the issuance of home loans, it simply helps you out to weigh all the negative impacts it could possibly have on your future and of your loved ones so that you can make an informed decision, as availing a home loan have certain advantages too; however, it is up to us how we execute the whole repayment so that it doesn’t cost something we didn’t wish for. 

References 

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