You have tried every possible way to repay your loan EMIs on time. In spite of your best efforts, a job loss, pay cuts, illness in the family, your loan repayments may go off the track. There may be situations where due to an unexpected financial crisis, you have fallen behind on your loan payments. In the worst-case scenario, you know that you will not be able to catch up on EMI payments anytime in the coming months.
If this is your first time missing your EMI, your lender may be able to help with a flexible repayment option. However, if you are a perennial defaulter, then the lender may take strict action.
Here, in this guide, let's take a look at the possible steps that lenders take when borrowers miss loan EMIs.
What happens when you miss a loan EMI?
Lenders have their own guidelines on what to when a borrower misses an EMI payment. While some lenders take action immediately, whereas others wait for a few months, providing the borrower with a grace period to catch up on payments.
Initially, the lender sends you gentle reminders – via text, email, or phone calls – reminding you to pay your loan EMIs on time. If this is the first time you have missed the payment, then the lender may allow you to pay the outstanding amount with or without late fees.
If there is no response from the borrower's side, the reminders get more aggressive. Besides contacting the borrower, lenders also inform credit bureaus of the delay in payments by the borrower. As a result, the borrower's credit score starts to decline, and the defaults are noted in the credit report.
After 120 days of the initial communication, the lender usually sends a letter of demand claiming the balance amount in full as a single payment.
Additional Reading: What happens if I miss an EMI payment on my loan?
What action can the lender take when borrowers default on loan payments?
The action taken by the lender depends on the nature of the loan taken. The consequences vary for secured and unsecured loans. Let’s take a look at what happens for a few common types of loans:
Secured loans include home loans, car loans, bike loans, loans against property, etc. If the borrower misses several EMIs and doesn't respond to the lender's communication, the legal rights (ownership) of the property/asset are taken over by the lender. For instance, the lender can take possession of the bike, car, or house.
In case of assets like shares, insurance documents, gold, and other investments, the lender is eligible to take possession of these assets. The lender sells the assets at market value to recover the cost of the loan.
However, in both cases, taking ownership of the property or asset pledged is the last step. Initially, the lender tries to communicate with the borrower and work out a way to get the loan back on track.
Before selling or taking possession of the asset/property, the lender is legally obligated to send due notifications to the borrower. The creditor requests the borrower to pay the debt within a specified time frame. And also warn the lender of the consequences if he/she fails to repay on time. Only after sending the required number of notifications, can the lender take possession of the property/asset.
An unsecured loan is where the borrower doesn’t pledge any collateral/asset while availing the loan. Some popular unsecured loans include personal loans, student loans, small business loans, etc. Unlike secured loans, there is no property/asset in an unsecured loan to recover the cost of the loan. Here’s what happens when you default on an unsecured loan:
Fall in credit score of the borrower – This consequence happens for both secured and unsecured loans. When you fail to repay your EMIs on time, the lender notifies the credit bureaus, which reduces your credit score. Drop-in credit score makes it harder for the borrower to avail loans in the future.
An increase in the interest rate – Missing on EMIs or paying EMIs after the due date could lead to a rise in the interest rate of your ongoing loan. The lender charges additional fees and penalties, thereby further increasing your loan burden.
Harassment by collection agencies – Sometimes, lenders hire collection agents to help them recover their money. The agents visit you or contact you and threaten you with lawsuits, forcing you to pay the outstanding amounts.
Lawsuits – When the lender sees no other way to recover the money from the borrower, they file a lawsuit. The financial institution (bank/NBFC) sues the borrower for defaulting on the loan agreements. The case is taken to court and generally cleared when the borrower pays the outstanding along with the legal fees and other charges.
How to avoid defaulting on a loan?
If your finances have taken a downturn and you are worried about paying your loan EMI on time, it’s best to be proactive and contact your lender before the situation worsens. When you explain your financial crisis to the lender, sometimes the lender may offer you a temporary relief (like pausing EMIs for a few months). This gives you some breathing time, allowing you to get back on track.
Alternatively, you can consider refinancing your loan. Refinancing is the process of shifting your outstanding loan from one lender to another. The main objective of refinancing is to avail loans at reduced interest rates. Check if this option is possible for you.
Another option is to borrow from friends and family and repay your outstanding EMIs and get your loan payments back on track.
Can I file bankruptcy to escape the consequences of defaulting on a loan?
Filing bankruptcy is an extreme step that must be considered only in the direst situations. While filing bankruptcy may get the creditor off your back, it doesn't eliminate all problems magically. Even after you have filed for bankruptcy, the lender can still take possession of your pledged assets like a vehicle, house, etc.
Once you have initiated bankruptcy proceedings, it's going to be very challenging to get your credit score back on track. The effects of bankruptcy remain on your credit reports for a long, long time.
Don't Panic and Be Proactive
Despite your best intentions, there may be situations where you cannot repay your EMIs on time. Don't panic and give in to stress. Start by calmly figuring out your incomes and expenditures. See if you can cut down any unnecessary expenses, so that you have funds to pay for your EMIs.
If that's not possible, it's always better to be proactive and approach the lender. Instead of avoiding the issue until the last minute, take the right steps and work out a flexible solution with the creditor.