What Is A Personal Loan?
A personal loan is an unsecured loan that can be used in many different ways. You can fulfill different financial needs with a personal loan, like paying for a vacation, meeting the costs of a medical emergency, or even making a premium purchase.
In a personal loan, the lender does not ask for any collateral as a security against which you can avail the loan. And since there is no security required, banks and non-banking financial companies give more weightage to the borrower’s repaying capacity before approving the loan. So, to avail of a personal loan you need a good credit score and a steady stream of income into your account.
What Is A Loan Write-off?
As a borrower, you are expected to pay back a loan taken by you within a specified time frame. However, you may sometimes not be able to pay it back on time or even after its tenure gets over. When you fail to repay the loan amount for three consecutive quarters, such a loan is designated as a bad loan or non performing asset or NPA.
In such cases, when recovery of a loaned amount becomes next to impossible, banks or financial institutions are forced to write-off the amount. Once written off, the amount is removed from the balance sheet of the lender and maintained in off-balance sheet records where efforts to recover the amount may still continue.
Difference Between Write-off And Waive-off
The difference between write off and waive off is explained below.
In case of a write-off, the lender acknowledges that the chances of recovery are nearly zero, and clears the record of the outstanding amount in their balance sheet.
In exceptional circumstances, when you are unable to pay back a loan you have taken due to a financial crisis, the government may choose to “waive-off” your loan after conducting a thorough examination of your situation. In such cases, while the borrower no longer carries the burden of repaying the loan amount, the lender may still harbour hopes of recovery at a later stage.
Writing-Off Personal Loans Can Create Several Problems For Borrowers:
If your loan is written-off by a lender, it will severely affect your credit score. A reduced credit score causes the following issues at the time of borrowing in the future:
- Lenders identify you as a potential default risk and hence are averse to loaning you any money in the future.
- Even if a lender is willing to lend you money, they will do so at a much higher interest rate, which will increase your overall cost of borrowing.
Considering that having your personal loan written-off will have repercussions on your future financial health, it is best to ensure that you avoid such a situation by choosing loan amounts that are within your repayment capacity and also opting for personal loans with lower interest rates.
The Bottom Line:
Your personal loan can be written-off by a lender in case you fail to repay it far beyond the specified period. However, such an action can impact your credit score and hamper the chances of you ever being able to borrow money in the future. It is best to avoid such a situation, by exercising prudence at the time of borrowing, and only taking a personal loan which satisfies your capacity to repay. You can visit Finserv MARKETS to know in detail about what is personal loan and which personal loan is best for you.