“Bad Credit”, “Venture Customer” – We have often begun to hear these words lately. In this line of thought, it is well-established and honest to discuss the issue of the consequences in the event of failure to repay the loan.
According to statistics, by May 2012, almost a quarter of all loans made in the country are in the “bad” column – meaning that their recipients for one reason or another are unable to service their credits.
Tools to deal with bad loans
Banks, of course, have certain tools to deal with bad loans, for example, by seizing the proceeds, and if the client has taken a mortgage loan – a forced sale of the pledged property. The measures seem and are tight, but they do not aim to make banks and financial institutions rich but cover their credit risk. A separate issue is that in most cases the non-payment of the loan is unintentional, and often the borrower simply does not have the opportunity to pay the loan on time, or there are some financial difficulties, leaving the job, business shocks, and so on.
The instruments of non-banking institutions are similar to those described above. Real estate is a basic guarantee because we do not investigate income and we do not look for other guarantees and collaterals (in the form of personal accounts, etc.). A very important factor is that the risk that non-banking institutions assume is far greater than that of banks because they work with people who, for some reasons, are unable to finance by banks or want an extremely quick response, respectively, represent a more serious “risk” for the creditor. The property is the financial institution guarantee that in case of non-payment of the loan, they will be able to cover the credit risk, which is much higher than in the case of banks. This determines the much higher rate of interest.
What happens if the borrower is unable to comply with the repayment schedule of the loan:
From a formal point of view, by law, if you reach 6 unpaid installments, the financial institution has the right to declare the property for sale, for example. But nobody in the industry really wants such a development. Before they get to the sale, they look for options to help you continue servicing your credit:
- an increase in the payout period
- negotiating periods in which you only pay interest
- and others.
The goal of financial institutions is not to acquire your property and to make a profit from its sale – on the contrary. At the sale we only get the “due”, the rest remains for you. But in order to get the due amount as quickly as possible, the property is sold at a price below the market price. Apart from this forced sale, we would have many other costs – financial and time. And last but not least – we are not a real estate agency and the forced sale of your property is a burden for us, not a holiday.
That’s why selling the property is the worst case scenario for both you and the lender. The best scenario is to give you a good credit with good interest, which you can pay correctly and on time. Sometimes, however, reality turns out somewhere in the middle.
The financial institutions know that times are uncertain and that for the period of repayment of a loan, the situation may change a lot – our client may lose his job, his company’s revenues drop, and so on. The lender will make an effort to conduct an open dialogue with you – the customers – to minimize the “bad” loans. And if that happens, they will find the best mutually beneficial option.
— Financial Times (@FT) November 28, 2017