Loans have become the go-to option when you face a crunch in funds. This is due to the advent of many instant loan lenders who are willing to lend loans with a quicker turnaround time. They give borrowers the flexibility of choosing their own tenure according to their convenience. But, then individuals may default on their loan EMIs. Let us now understand what happens when you miss an EMI payment on your loan.

Missed EMIs are Classified into 2 Categories

Major defaults:

Major defaults are those that incur bigger penalties. A missed EMI is considered as a major default if you have not made any payments in the last 90 days or more. It is noted in your credit report and can impact other loans in the future. Most lenders do not sanction the loan applications of applicants with major defaults in their credit reports. When your loan account has a major default, it is marked as an NPA or non-performing asset.

Minor defaults:

Minor defaults are those that incur minor consequences. These can be rectified. A missed EMI is classified as a minor default if the last payment is within 90 days or less. Borrowers who have minor defaults on their loan accounts can recover from the negative consequences if they take action on time. 

Impact of Loan EMI Defaults

Here are some of the consequences of loan EMI defaults

  • Negative impact on credit score: This is one of the most hampering and common consequences of defaulting on your EMIs. The lender reports missed payments to credit bureaus leading to a lower credit score. The impact can stay on your credit report for several years and affect your chances of obtaining credit. A low credit score can impact your chances of getting credit cards, obtaining preferential interest rates on loans, or renting an apartment.
  • Increased Interest and fees: Defaulting on a personal loan incurs penalty and a spike in interest rates. For collection efforts, the lender will levy additional charges or penalties. Additionally, the interest rate can soar up considerably increasing the financial burden. So, as a result, the total loan amount owed will be high.
  • Collection efforts: Collection efforts will be taken by the lender to recover outstanding amount. It may be through phone calls, emails, SMS, letters, etc. Lenders may hire a collection agency to recover the loan. These collection agencies may sometimes send recovery agents to your workplace or residence.  The job of these recovery agents is to collect the due amount from you. Generally, most lenders opt for recovery agents only when the loan is classified as an NPA. Usually, lenders send a 60-day notice to borrowers before they consider the loan as an NPA. A visit from a recovery agent is not only stressful but also embarrassing.
  • Legal action: Further, if lenders feel that it is necessary, they can take legal action to recover the amount due. This legal step can result in additional fees such as lawyer costs
  • Negatively impacts personal relationships: Defaulting on a personal loan has a damaging effect on personal relationships. If you have borrowed from family or friends and don’t repay on time, it could hamper trust, faith, and the warmth of relationships.
  • Get Blacklisted by credit bureaus: Credit bureaus blacklist those who default on personal loans thus hampering your chances of getting loans from other lenders in the future. It may be hard even to get credit card approvals.
  • Seizure of collateral: If the loan is not paid on time, the collateral pledged may be seized by the lender.

Ways to Avoid Missed EMI Payments 

  • Seek a lower EMI: If you already know that you will be defaulting on a loan EMI, then speak to the lender and inform them of the financial crunch that they are entangled in. Lenders may then lower the EMIs by increasing the loan tenure. If the loan is an unsecured loan, then the lender will get it converted into a secured loan, for which the interest payable will be lower. Out of these two options, changing the secured loan to an unsecured loan is better since the increase in loan tenures is allowed by very few banks. Also, the reduction in EMIs is significant when compared to extending loan tenures.

  • Make Part payments: Part payments are another ideal way to lower the EMI payments and the interest rate. When the borrower has extra funds, making a part payment can reduce the financial burden.

  • Request for an EMI-free period: When the borrower is stuck in a financial crunch where there is an interruption in the flow of income, the borrower can approach the lender and ask for an EMI-free period. When customers lose their jobs or have problems in their businesses, banks will grant them an EMI-free period of 3 to 6 months. Following this, the borrower must renew the EMI payments.

  • Chalk out a budget: In order to avoid defaulting on EMIs, the borrower must chalk out a budget and plan his finances better.

  • Have an emergency fund: Financial advisors recommend that you always maintain an emergency fund to dip into during a financial crisis. The emergency fund must hold around six months of your salary. This way, you can use this fund to pay for your household expenses and EMIs if something unexpected happens to your income flow.

  • Seek the help of friends and family: You can approach your friends or family for an informal (interest-free) loan to help you repay the EMIs. You can later pay back the loan amount once your financial situation recovers.

Conclusion

Evaluate your Finances Carefully before Applying for a Loan. With the easy availability of loans, it may be tempting to get one. However, before you apply for a loan, you have to evaluate your financial situation carefully and decide whether you will be able to afford it. Missing loan EMIs leads to several negative consequences. So, make sure that you pay your EMIs on time.

Frequently Asked Questions

1. What are the EMI payment options available on loans? 

One can pay their EMIs via NACH mandate, ECS, or post-dated cheques. 

2. What happens when I miss an EMI payment? 

Missing an EMI payment on your loans can result in interest charges and late payment charges. 

3. What is the average late payment charge for missed EMIs on loans? 

One missed EMI can cost you about 1-2% of your outstanding loan amount as later payment charges. 

4. When is a late payment considered a default? 

Any EMI payments, missed for 90 days or more is considered a default. 

5. Do missed EMI payments affect my credit score? 

Yes, missing an EMI payment is recorded against your repayment history and affects your credit score. 

6. How many credit score points will be reduced for a single missed payment? 

A single missed EMI can result in a drop of 60-70 points from your credit score. 

7. How long will a payment default stay on my credit report? 

Payment defaults stay on your credit report for 7 years, after which they are dropped from your report. 

8. Can I request my bank to stop charging my EMIs for some time? 

If you are facing any financial constraints, you can ask your bank for an ‘EMI Moratorium’, where EMIs will not be deducted from your account but the interest will keep accumulating. This amount will be adjusted as higher EMI amount or longer EMI tenures.