Credit score

Will defaulting on repayment hurt the child’s credit rating?

Failure to repay a student loan affects the child’s credit rating and impacts the co-applicant’s credit ratings. Applying for a student loan is one way to enter the credit system; when an individual submits a loan application, the financial institution verifies the CIBIL score with the bureau, effectively entering the credit system.

Ankit Mehra, Founder and Managing Director of GyanDhan, an edu fintech company, said, “Failure to pay a student loan has serious repercussions for the borrower and co-borrower, although it may depend on the amount of the loan. borrowed loan. The loan qualifies as a non-performing asset (NPA) if the equivalent monthly installment (EMI) is 90 days past due. If the loan amount borrowed was only 4 lakh, then the borrower and guarantor usually get warning letters and notices first. If they are not careful, the borrower is declared defaulting. In such a case, the lender takes legal action against the borrower. Similarly, for student loans up to 7.5 lakh, collection agencies harass borrower and co-borrower for repayment. If the borrower had given collateral, it would be seized and auctioned off to settle the debt.”

The impact of default is not limited to warning letters and notices. The borrower may no longer obtain credit, including credit cards and personal loans.

Mehra said: “If the borrower stops responding to warnings and notices, the bank focuses on the co-applicant and guarantor, who are often the parents of the borrowers. The bank can reduce its losses by settling the loan for less than the loan amount as a last resort. As a result, there will be a negative impact on the CIBIL score, and the credit report will mention the settlement, but the consequences are worse in case of default.”

what you should do

Adhil Shetty, CEO of BankBazaar.com, said large-value student loans are often backed by collateral that the bank will liquidate to recover its rights. “The damage to credit health can be long term. Therefore, the best solution for the student is to find ways to repay the loan. In the event of payment difficulties such as lack of employment, the borrower should continue to engage with the bank to determine ways to make payments more manageable,” he said.

Sometimes students are not sure about their financial capabilities, their future income. In this case, the student should opt for a longer loan term, lowering the EMI amount appropriately. Although this lengthens the repayment period, it will be more manageable for the borrower. Mehra said, “Students should also set up an emergency fund with the aim of timely repayment even when income is irregular. If the student is about to default, they should have the loan restructured.”

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