Have you missed an EMI for your loan payment? You need to know what happens when you miss a personal loan EMI to avoid any issues. There is no denying the fact that personal loans are one of the most flexible options to obtain credit. With this loan option, you can finance major expenses like a home renovation, other investments, or medical bills. In addition to the personal loan, you should also know the difference between a bond and a loan for future reference.
When you apply for a personal loan with the help of a reliable provider, you can expect minimal documentation and overall ease of approval. Moreover, you are also provided a flexible repayment term that ranges from one year to five years.
Even with a wide range of comfortable features, you can end up missing out on the monthly EMI payment due to some reason. If you miss out on a few EMI payments, it might not be a major blunder. However, this occurrence indeed affects your credit score. If you are not able to pay the loan EMI, the lender will regard you as a loan defaulter.
Understanding Loan Defaults
Typically, there are two types of loan defaults. You should know about these categories to be updated about personal loans and their terms:
- Minor Defaults: If you do not exceed 90 days on the personal EMI repayment, it is regarded as a minor loan default. This means that you can make the EMI payment within 90 days after the scheduled date. However, it is important to understand that it can still have some impact on your credit score.
- Major Defaults: In some cases, you might end up in a payment default when you do not make the EMI payment for more than 90 days of the stipulated period. In this case, the lender will regard you as the defaulter.
One of the major drawbacks of being a part of this default is that banks or financial institutions might altogether avoid approving your loan application. Moreover, it will also affect your credit report negatively.
What Happens If You Miss the EMI Payment on Your Personal Loan?
In case you default on the loan EMI payment, here are some effects to consider:
1. Poor Creditworthiness
Your credit report contains all information related to the debt repayments. This report depicts your repayment history. Therefore, even when you have a good credit score of more than 750, you can still have low creditworthiness in case you miss EMI payments.
This might be due to the comments or reviews on your credit report. Ultimately, negative comments or reviews on your credit report can lead to loan rejections altogether.
2. Low Credit Score
Your credit score is a major determinant of your eligibility to apply for a personal loan. Therefore, in case you default on the loan EMI payment, it will affect your credit score. Most banks or lending institutions look for a credit score of 750 or more. Therefore, if you end up missing even one EMI payment, your credit score can drop by around 50-70 points easily.
3. Reduced Capacity to Borrow in the Future
Before giving approval for your personal loan application, the lender looks into your credit score and the credit report. However, if you default on the EMI payments, it might create a wrong impression for the lender. They will not be willing to offer you the loan amount. In turn, this reduces your future potential for borrowing any loan amount.
4. Extra Charges and Late Fees
A major consequence of not paying the loan EMIs on time is that you have to incur extra charges or late fees as imposed by some institutions. Usually, the late fee is around 1-2 percent of the due EMI amount.
5. Recovery Agents
When you end up making a major default, not paying the EMI amount even after 90 days of the stipulated period, the last option for lenders is to send over a recovery agent. Usually, banks issue a 60-day notice period beforehand to the borrower before declaring the given account as NPA.
6. Legal Proceeding
When you are not able to repay the lender, they will have no choice but to take the matter to the court. You should understand that legal proceedings can be both time-consuming and expensive. Eventually, this will also damage your credit history and overall reputation as a borrower.
7. Backlisting by the Lender
There are several benefits of a healthy lender-borrower relationship. These benefits could include convenient loan terms and a seamless approval in future applications. In case you default on the loan EMI, it will affect your relationship with the lender. In extreme cases, lenders might even go ahead with blacklisting your credit profile from applying for a personal loan in the future.
8. Reducing the Credit Score of the Co-signer
In case you have employed a co-signer for your personal loan application, they will also have to face the consequences. When you do not make timely EMI payments, the co-signer’s credit score will also be affected. This is because the co-signer shares the responsibility of the loan repayment. Lenders might also include the co-signer in case of a legal proceeding.
How to Avoid Loan Defaults
You should strive to avoid missing out on EMI payments for your personal loan. To avoid its circumstances, here are some tips to consider:
1. Requesting Low EMIs
You can reach out to the lender to communicate that you might delay the EMI payment for the scheduled date. Let the lender know about your existing financial situation and make a request for a low EMI amount. Lenders can consider reducing the EMIs by extending the loan repayment tenure or converting your unsecured loan into a secured type.
2. Plan Your Finances Beforehand
To avoid making a loan default, you should plan out your finances beforehand. You can use a reliable personal loan EMI calculator and compare different factors like interest rate while choosing the right EMI plan.
Conclusion
When you miss out on an EMI payment for your personal loan, it can have major consequences. Moreover, repeated defaults could lead to legal actions taken by the lender. To avoid these issues, it is important to plan out your finances, set reminders, and explore different financing options.