The question of what will happen to loans in the event of default is of interest to a fairly large number of people, and the main reason for this is the unstable world economy. The concept of "default" has been associated since 1998, not only among economists, but also among ordinary people. In the memoirs, the fall of the ruble and empty shelves in shops, large lines for groceries. In the world arena over the past 20 years, in addition to Russia, three more countries had to face the phenomenon: Mexico, Argentina and Uruguay.
What is “default” through the eyes of economists?
In the literal sense of the word, it is generally accepted that a complete refusal of any object to pay its obligations is considered to be default. In other words, at the state level, the country officially declares that it does not have the means to pay debts. There is a technical modification of the phenomenon. In fact, the object is not able to pay the bills, but it does not make an official statement about it. There is a corporate and even personal format of the situation. The consequences of default are considered to be a negative phenomenon. However, as with every coin, there are positive aspects to the situation. On the one hand, you can see the collapse and complete destruction of all external relations of a financial type, and on the other hand, a unique chance to begin the history of the development of the state from scratch, without errors and mistakes.
What happens when a state refuses to pay debts?
The government’s refusal to pay the debt affects not only its reputation, but also leaves a negative imprint on the financial rating. The specifics of the modern economy lies in the practice of borrowing from virtually every country in order to increase income or to close the “holes” in the budget. The independence of the international lending market provides a refusal to finance a country that has a bad reputation. Loans in this situation become possible only with the provision of appropriate collateral. Bankrupt country almost completely loses financial insurance.
National currency depreciation
Many of the consequences of default are due to a sharp drop in the national currency. The cost of money directly depends on the level of trust in the state. Lower prices for the national currency leads to limitations on the country's capabilities within the global market. The state becomes "poor" against the background of other countries. In particular, a three-fold reduction in the value of the national currency leads to a reduction in purchases by a similar amount. An underdeveloped industry can lead to a shortage of food in the country. At the same time, there is a drop in income among the population and a decrease in living standards. The work of companies based on the international component (components, financing) becomes unprofitable. Reducing the number of jobs leads to a general deterioration of the situation in the country.
Banking system and policy
Considering the question of what the default means, it is worth noting the negative phenomena in the banking sector. The state financial system is dwindling. The opportunity to use foreign loans disappears, debt is growing. Bankruptcy of most financial institutions becomes inevitable. Each client of the bank loses its funds, since all accounts are frozen. Due to the fact that the economic growth of companies is impossible without the provision of loans, commercial activity in the country stops. It is almost impossible to get a loan from a bank, as the latter has a very limited money limit. Due to distrust of the financial system in the country, the level of trust in politicians is falling. The solution of important economic issues at the international level is significantly complicated.
What good is defaults?
When a crisis ensues, default is in its prime - it signals that the country has accumulated a huge amount of money in debt and is now unable to pay even interest on it. There are not enough funds to solve the dominant state problems, since the bulk of the budget goes to debt servicing. When a country loses external support, it directs all resources to solving internal problems; previously underfunded sectors receive material support. Experts agree that, due to default, the level of competitiveness of the country's economy and domestic production increases significantly. Since wages and the purchase of goods are carried out in a depreciated currency, there is a reduction in the cost of goods and services for an external buyer. The fall in prices for goods and services leads to the formation of demand, to an increase in the number of orders, to the activation of previously "sleeping" capacities.
Complete coup
It happens that during a default it is possible to get not only a bank loan at a low interest rate, as banks try to attract customers by all available means, the phenomenon leads to a complete upheaval in the country's economy. Isolation from external financing and imports takes the country to a new, safe standard of living. Domestic consumption and funding sources are prevailing. The economic downturn pushes puffed economic sectors out of the market. Phenomena when the company's shares are an order of magnitude higher than their real price are completely eliminated. Real values acquire real value. All financial imbalances are eliminated.
Debt reduction
Many are interested in what will happen to loans in case of default. Nothing terrible will happen. If we consider the situation at the state level, then the country gets a unique chance and good reason to start negotiations on restructuring and debt reduction. Lenders, perceiving and evaluating the picture of what is happening, quite often make concessions, since they simply do not have another opportunity to return their funds. We can say that default is a great opportunity for a country to adapt its economic model to the realities of the modern world.
What will happen to loans in case of default and what can you not even count on?
Many people simply do not understand that default is not a chance not to pay the debt to the bank. A state that has officially declared inability to pay debts is not a reason for refusing to pay debts to a financial institution. Borrowers, despite the situation in the state, are obliged to continue to fulfill their obligations to the bank. Moreover, any breach of contract or a minimum delay will be punished with all severity. It is the funds that were issued on the eve of the borrowers that act as a financial insurance pillow for the bank during times of crisis. If during periods of stable development of the country's economy the delay was accompanied by simple phone calls and warnings, in case of default the bank will strictly demand the fulfillment of its obligations from the client, up to the withdrawal of collateral.
What should borrowers do?
The percentage of people who are users of loans is quite large. It is common practice when families have a large financial burden, when the income level is much less than the existing debt. With a stable economic development of the country, such a debt burden is still maintained, but in the event of a catastrophic fall in the currency, it becomes an unbearable burden. In a situation, the main thing is not to delay payments and not wait for weather from the sea. It is worth immediately contacting a financial institution with a request for re-lending or for restructuring. As practice has shown, financial institutions make concessions, since in the situation with external lenders for them flexible partnership becomes the only chance to stay afloat. It is due to the return of debtors' funds that it is possible to fulfill obligations to investors and not to leave the financial market, retaining the license and avoiding liquidation.
What do banks have and are not entitled to?
When considering the issue of what will happen to loans in case of default, one should not hope that banks will forgive all of their debtors. Rather, on the contrary, measures aimed at repaying debts will only be tightened. Borrowers must be aware that no financial institution has the right to violate the terms of the contract. Loans during default, in particular mortgages or car loans, are not subject to change. The Bank does not have the authority to change the terms of the partnership and to increase interest on payments. An exception may be situations where these items are provided for in partnership documents. If unlawful measures are taken against the borrower or they require payment at an inflated interest rate, he has the right to appeal to consumer services. These default moments are especially strictly controlled by the state.
What loans are common in default, and which are the most problematic?
Having dealt with the question of default what threatens the country and private individuals, it is worthwhile to dwell on the field of credit availability. The lack of funds in the country and in most financial institutions does not make it impossible to take loans. Another thing is unprofitable conditions, which you just have to agree to. During periods of bankruptcy of almost all levels in the country, consumer loans can be forgotten. A small percentage for using money amid the crisis will not save the banks, since it simply will not block the percentage of defaults. Considering the question of how default will affect loans, we can talk about the popularization of such areas as express lending. It is characterized by a rather large reserve of funds, since the average interest rate on this banking product is about 50%. High rates are offset by a simple loan scheme and a minimal documentation package. Financial institutions offering this type of loan are able to easily survive about 20% of non-repayment of funds. In times of crisis, it is better to try to avoid obtaining a loan, since the bank is unlikely to provide favorable partnership conditions. After the crisis has passed, the debt will have to be repaid on previously accepted conditions, which will be very problematic to call rational.