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Introduction
In recent years there has been a surge in the number of individuals opting for personal loans to finance their travel, shopping, and other urgent financial needs. Personal loans are unsecured loans that can be availed with minimal documentation and are disbursed fairly quickly. These come with a flexible repayment schedule that ranges between 1 year and 5 years. Banks and other lending agencies provide their customers with the option of choosing the loan tenure that is most convenient for them. These are some of the primary reasons why most people prefer personal loans over other types.
Despite selecting a repayment tenure and EMI options that are comfortable, there are certain instances where the borrower could have trouble repaying the EMI for a particular month or time period. Missing on 1 or 2 EMI payments might not look like a big deal but it does have certain negative impacts.
Types of Loan Defaults
A lot of banks and financial institutions categorize loan repayment defaults into the following 2 categories:
- Major defaults - These are default types where the borrower does not make a payment in more than 90 days. Most financial institutions avoid lending to individuals who have major payment defaults in their credit reports. When an individual has payments pending for more than 90 days, the loan account is marked under the Non-Performing Assets (NPA) group.
- Minor defaults – Under these the non-payment is less than 90 days. Borrowers who have minor defaults against their loan account can recover from any form of negative impact on their CIBIL™ score due to such non-payment.
The outcome of Missing Personal Loan EMI Payments
Here are some of the consequences of missing out on personal loan EMI payments.
- CIBIL™ Score – One of the immediate consequences of defaulting on personal loan payments is a decrease in the credit score. Most lending agencies require borrowers to have a CIBIL™ score of 750 or more to be eligible to apply for a loan. Missing a single EMI payment can result in the borrower’s credit score dropping by 50 to 70 points.
- Credit Worthiness - A borrower’s credit report generally contains comments about the individual’s repayment history. In most cases, even if the borrower’s CIBIL™ score is above 750, the comments about payment defaults in the credit report are the primary reason for personal loan rejection. Most lenders view these comments in the credit report and tag such individuals as risky borrowers who will not be able to abide by the repayment terms of the loan.
- Penalties - Many banks and financial institutions charge late fees as penalties for individuals who miss their EMI payments. The amount charged could vary but is usually around 1% -2% of the EMI that is due.
- Recovery agents – Sometimes banks and financial institutions may send recovery agents when the default period has extended beyond 90 days. The bank initially issues a 60-day notice to the borrower before the loan account is tagged as an NPA. This is best avoided as it could result in unwanted stress.
How to Avoid Loan Default?
Defaulting on loans is best avoided and there are a few ways to deal with it. In most cases, borrowers tend to have prior knowledge of whether or not they would be able to make the upcoming EMI payments. Here are some of the options that the borrower can employ to ensure that he avoids loan defaults.
Financial Planning - In order to avoid the chances of defaulting on a loan, it is advisable that borrowers plan their finances more efficiently and well in advance.
Choose a Lower EMI - If the borrower senses the possibility of defaulting on a loan payment, he should approach the bank and inform them of his financial circumstances and request a lower EMI. Banks can lower EMIs by either extending the existing loan tenure or converting an unsecured loan to a secured loan. When the loan is converted to a secured loan, the interest payable on the amount borrowed is also lower. Of the 2 options, converting an unsecured loan to a secured loan is ideal since the reduction in EMIs is significant when compared to extending loan tenures. Very few banks permit extension of loan tenures.
Part Payments – Making part payments is yet another way to lower the EMI payments and the interest rate. This method helps in ensuring that the borrower is capable of making EMI payments for the entire loan tenure. When the borrower has surplus funds and an active personal loan, making a part payment can ease the financial burden.
Request for an EMI-free period - The borrower can approach the bank and request for an EMI-free period in case he faces a crunch in the inflow of finances. Banks often agree to such requests made by customers, especially if they have lost their job or are temporarily facing issues with business operations. The bank gives customers a 3 to 6-month waiver on EMI payments, following which the borrower must resume EMI payments.
Ways to Improve Credit Score
A low credit score should be considered as a lesson for better handling of future repayments. There are certain tips or methods that can be followed so as to improve one’s credit score. Some of them are listed as follows:
- Pay credit card bills on time.
- Pay loan installments in full and on time.
- Keep credit card utilization ratio below 40%.
- Limit credit card applications.
- Avoid multiple loan applications that too in a short duration.
- Avoid closing old credit accounts.
- Check the credit report periodically for any mistakes.
- Fix late payments as soon as possible.
- Build a strong credit age.
End Note
Missing out on EMI payments on a personal loan is not uncommon but it could have some negative impact on one’s credit standing and credit-seeking capacity. It is best to learn more about managing finances and the situations that could lead to non-adherence of loan repayment.
FAQS
1. What are the options available to pay my personal loan EMI?
Personal Loan EMI is usually paid by auto-debit or NACH mandate directly from your bank account. This ensures that the EMIs are paid on time and that you don’t incur heavy penalties or interest charges.
2. What is the typical EMI amount for a personal loan of Rs. 10 lakhs?
An Rs.10 lakh personal loan, with a tenure of 5 years, and an interest rate of 10.5%, will incur an average monthly EMI of Rs.21.500.
3. What happens if I miss my personal loan EMI?
Missing your personal loan EMI can levy late payment charges and additional interest charges on your personal loan outstanding.
4. Can I pre-close my personal loan?
Yes, once you have paid a minimum of 12 EMIs, you are allowed to pre-close your personal loan.
5. How will I pay my EMI if I miss a payment?
In many cases, the bank will give you a grace period during which you can pay off your EMI. Following the end of your grace period, the bank will begin charging you late fees. Only if you fail to pay your EMI for three months or 90 days will you be added to the defaulter's list.
6. Can I go to jail for failing to repay a personal loan?
Failure to meet payment obligations can cause anxiety and worry for anyone, but in most cases, you will not have to serve jail time if you are unable to pay off your debts. You cannot be arrested or imprisoned simply for being late on your personal loan EMI.
7. How many EMIs can we afford to miss?
If a borrower misses one or two EMIs, the bank will not send continuous reminders. After three defaults, the bank usually sends a notice to the borrower, requesting that he pay his debts as soon as possible.
8. What happens if I do not pay the EMI for three months?
When a borrower fails to pay an EMI on time, several lenders charge late fees. The penalty charged is usually between 1% and 2% of the EMI. You must pay the missed EMI, as well as the penalty and the next month's EMI, in the following cycle.
9. What happens if my EMI is returned by my bank?
If your EMI is returned, you will be charged a late payment fee as well as EMI bounce charges. So, if the NACH mandate, ECS, or cheque fails to clear, you will be charged ECS bounce fees in addition to late payment fees.
10. Will one late payment have an impact on my credit score?
Even a single late or missed payment can have an impact on credit reports and scores. But, in general, late payments will not appear on your credit reports for at least 30 days after the date they are missed, though you may still incur late fees.
