What happens when you fail to repay a loan
Obtaining a loan from a licensed financial institution is common for many people; we borrow money, and agree to pay it back in instalments over a specific period of time as agreed in a legal contract, along with any other costs associated with the loan.
Most loans are completed without problems, but sometimes a borrower may default on the payments, perhaps because of a sudden change in their financial position. Many people worry about the legal consequences of a default, and about the measures financial institutions make take in dealing with a delinquent borrower.
A borrower may be considered delinquent if they lose their ability to fulfil their commitments to a licensed financial institution. The lender will update the information in the borrower’s credit report, held by licensed bodies such as the Saudi Credit Information Company. This report contains information about credit products obtained by the borrower, including those that have been in default for up to five years.
Anyone with a negative credit report may find it difficult to obtain further finance, and their bank accounts may be frozen. Property or assets used to secure the loan may be seized, and ultimately a delinquent and defaulting borrower may be prosecuted.
However, the law is not one sided. At the request of a borrower whose financial circumstances have changed, banks are required to reschedule the debt without a new financing agreement, and may not impose additional fees or costs.
Banks are also prohibited from deducting funds from a client’s accounts without a judicial ruling, the consent of the client, or a clear provision in the loan contract. Nor are they permitted to deny a client access to funds in their accounts without a judicial ruling.
The lender has the right to initiate judicial proceedings against a defaulting borrower in the event of failure to pay instalments for three consecutive months or five nonconsecutive months, but they must notify the customer of their intention to do so.
The Kingdom’s central bank, the Saudi Arabian Monetary Authority, has instructed all financial institutions to take the necessary care to communicate with customers before taking legal action, whether by email, registered mail, text message or telephone. Their staff should also provide customers in default with accurate information about the situation, and the measures the lender is entitled to take.
It should go without saying that borrowers must be cautious when taking out a loan; restrict borrowing to necessary and important matters, organize your finances, and ensure that there are always sufficient funds available to cover your monthly expenses and the loan instalments. It is crucial to notify the bank immediately if your financial circumstances change, such as salary, employment, or any other issue that may affect your ability to meet your financial obligations.
• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers.