Getting a loan today has become easier than ever before. Commercial banks (private and public sector) along with non-banking financial corporations (NBFCs) make it quite easy for borrowers to get a loan to meet their various cash needs. Additionally, several digital lenders today offer instant online loans within a few minutes.
As a result, millions of borrowers (both salaried and self-employed) have taken loans from their preferred banks and other small finance companies. The one drawback of easy loan availability is that - with loans readily available, borrowers fail to consider all the financial implications of loans.
While getting the loan amount is easy, paying it back on time becomes challenging for thousands of borrowers. There may be situations in life where one’s finances are strained. A loss of a job, illness of the primary breadwinner, family disputes, and unexpected expenditures – all take a toll on EMI payments.
Additional Reading: Personal Loan EMI Missed
Despite choosing a comfortable repayment tenure and EMI, borrowers find it impossible to repay EMIs on time, during a financial crisis. As a result, they miss EMI payments. Now, the big question arises:
What happens if I don’t pay my EMIs on time?
What are the consequences of missing a couple of EMIs?
Here, in this guide, let’s explore what happens when you miss your loan EMIs.
Classification of Loan Defaults
Missed EMIs are classified into two categories. They are:
As the term implies, these incur the 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's marked as an NPA (Non-Performing Asset).
As the term implies, this type of default incurs minor consequences, which 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 the right timely action.
Consequences of Missing Loan EMIs
Let’s now take a look at what happens when you miss an EMI payment.
Impacts the credit score negatively
This is the most well-known consequence of missing an EMI payment. When you don’t make the EMI payment on time, it’s marked as a minor or major default on your credit profile. As a result, your credit score takes a hit.
Maintaining a high credit score is essential when you apply for a new loan. It ensures that your loan application is sanctioned, and you are offered the best interest rates. Missing even a single EMI payment brings down your credit score by 50 to 70 points.
It’s noted in the credit report
Besides your credit score, missing an EMI payment also leads to a black mark in your credit report. Borrowers consider your credit report to determine your creditworthiness. When they notice this black mark, they are not likely to approve your loan application. And, even if your loan request is sanctioned, you will be charged higher interest rates.
Late fee penalties
Several lenders levy late fees penalties when a borrower misses paying an EMI on time. The penalty charged is usually around 1% to 2% of the EMI. You have to pay the missed EMI along with the penalty and the next month's EMI, in the next cycle.
Harassment by recovery agents
This is the worst-case scenario and most stressful of all these consequences. Banks and finance companies sometimes send recovery agents to visit you at your residence or workplace. 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.
4 Ways to Avoid Missing EMI Payments
As you can see, even missing a single EMI can lead to negative consequences. Hence, it would help if you evaluated whether you will be able to pay the EMIs on time before you take a loan.
Here are a few ways to help you plan your finances better and pay your EMIs on time.
If you suspect that you won't be able to pay the upcoming EMI on time, you need to take action before its too late. Approach your lender before the due date and explain your financial circumstance. Check whether the lender will be able to pause EMIs temporarily. Else, you can request the lender to reduce the EMI, until your financial situation recovers. Most lenders honour these requests by borrowers, especially when they have not defaulted before.
Request for EMIs to be paused temporarily
You can approach your lender for help if you suffer from a loss of income due to layoffs or a job loss. Lenders often oblige a pause in EMI requests, especially when the borrower is suffering from a loss of income. Most banks offer a 3 to 6 month EMI waiver (no EMIs for the next three to six months). You can continue repaying the loan once you get back on your feet.
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 happened 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 to your friend, once your financial situation recovers.
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.