What do I need to know to get an effective and above all sustainable arrangement for my “red loan”?
This article aims to answer, in a simple and understandable way, the basic questions that usually concern a borrower with a “red” loan.
1. Why is it necessary to settle my loan?
The first thing that happens when a borrower does not pay his loan is that he is charged interest on the overdue amount (2.5%).
Subsequently, if the borrower does not respond within 90 days to the settlement or adjustment of his/her overdue debts, then the road to legal action is opened for the Bank or the Fund, with the first step being the termination of the loan agreement.
After the termination of the contract, the bank or the Fund will proceed to issue a payment order for the overdue amount, so that it can then “auction” the borrower’s movable or immovable assets and seize the money in bank accounts or rents that it may collect from third parties (e.g. rents).
2. Is it in my interest to extend my loan?
A classic arrangement offered for loans that are repaid in instalments is the loan extension, i.e. the extension of the loan repayment period.
This solution is appropriate in cases where the instalment is high for the borrower and needs to be reduced so that he/she can meet the payment according to his/her income.
However, the choice of this arrangement requires caution, as extending the loan without reducing the interest rate means an increase in the total interest that the borrower will pay on the loan.
If an extension of the loan is eventually chosen as a way of arrangement, and the borrower is relatively old (or the length of the extension is also old), then the addition of a younger guarantor may be requested.
3. Does it make a difference whether my loan is with the Bank or the Fund?
As far as the contractual obligations and rights of the borrower are concerned, it makes no difference whether the loan (whatever form it takes) belongs to the bank or the Fund. Moreover, there is no difference in the legal tools (e.g. termination, payment order & foreclosure) available to the Fund and the bank to “go after” the borrower.
However, there is a substantial difference in the priorities of a Fund and a bank in managing their “red” loans.
The bank operates within a strict regulatory framework with restrictions on the management of loans from deposits.
Instead, the fund only has to answer to its shareholders, who want a quick return on investment with a satisfactory profit. For this reason, the Fund is more flexible to write off larger amounts if it receives the balance of the loan immediately or soon.
On the other hand, the Fund may prove to be more aggressive in taking legal actions such as foreclosure and auctioning of property if it considers this to be in its interest (e.g. good market value of the property securing the loan).
4. Which arrangement is in my interest to accept?
And the key question is “What is the arrangement that is in my interest to accept?”
Obviously, the answer to this question is not one, as there are many types of loans and the data of each case differ, depending on the type of borrower (individual, self-employed or business), the type of loan (business loan, mortgage loan, etc.) and the type of collateral (real estate, deposits, etc.).
However, we could mention some key features that a good arrangement has for the borrower.
Not to pay more money in the end
The arrangement that the debtor will accept should not only make it easier for him, but should also not burden him with additional interest.
A typical example of this is the extension of an instalment loan (business or mortgage loan), which reduces the monthly instalment. The borrower should take care that the loan extension is not accompanied by an increase in interest rate as is usually the case, as this will mean an increase in the total debt to be repaid at the end.
Avoid an arrangement that cannot be complied with
The arrangement is not an end in itself to keep the bank or fund happy but should solve the borrower’s difficulty in servicing their original agreement in a realistic and sustainable way.
If the borrower agrees to an arrangement that he knows he will not be able to service the following year, then it gives the creditor an additional argument later on to plead to the judge that the borrower is a strategic defaulter as he did not comply with the agreed arrangement. Furthermore, by accepting, without negotiation, an unrealistic arrangement, the borrower misses the opportunity to pressure the creditor to offer a better arrangement.
To get a haircut on my debt
We would say that the haircut is the pious fear of all borrowers, but at the same time it is the last resort that the bank or the Fund will choose to propose. For example, there is no way a write-off can be proposed on a loan that is fully secured by a property of good commercial value. In contrast, on an unsecured loan provided that the borrowers, and the guarantors, do not own any encumbrance-free property, then the bank or fund is more receptive to proposing a write-off as part of the arrangement.
The purpose of this article is not to give advice to the borrower to negotiate the loan with the bank or the fund as each case is different and successful negotiation requires careful study of the facts of the case and handling by a qualified professional with knowledge and experience in the subject.
The purpose of this article is to present the framework and the unwritten rules of a negotiation so that the borrower can understand the general process and get a realistic sense of what he can achieve for the regulation of his loans.
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