What Happens If You Miss a Personal Loan EMI Payment?

Today, access to loans is easier than ever, with banks and NBFCs offering loans with favourable terms. But sometimes, easy applications and the comfort of favourable repayment terms make you take loans without second thoughts. This could easily lead to a failure in loan repayment, post which you, as a borrower, have to face the consequences. This blog tells you about what to do when you can't repay your personal loan, the consequences of defaulting on a loan, and more. Read on!

Understand Your Current Scenario: Loan Defaulting & Recovery

Before we get into what you should do when you miss a loan payment, it's important to understand the situation you're in and what could happen next.  

Personal Loan Default

If you miss EMI payments, you're classified as a Personal Loan defaulter. Essentially, there are two types of loan defaults:

• Minor Default: Delays under 90 days are minor defaults and can be corrected by repayment, but may still affect your credit score.
• Major Default: Delays over 90 days are major defaults, marked as non-performing assets (NPAs), which hurt credit chances and may lead to legal consequences.

Also Read: What Happens To A Personal Loan If The Borrower Dies?

Understanding the Loan Recovery Process

Once you're classified as a Personal Loan defaulter and don't repay your EMI on time, lenders begin what is called the 'loan recovery process' in phases. The goal of the process is to ensure lenders can minimise their losses while ensuring that the process remains fair and lawful for both parties.

It starts with reminder calls, emails, or messages from the lender regarding the outstanding loan amount. If dues remain unpaid, recovery agents may pay you a visit. When this happens, they will have to follow the RBI guidelines regarding the fair and ethical treatment of borrowers, so you won't have to worry about being harassed.

Continued defaults beyond 90 days make it a Major Default, which in turn can lead to a legal notice followed by tagging your loan as a Non-Performing Asset (NPA). Borrowers may face asset seizure or legal action in civil courts. Staying in touch with your lender early can help you avoid these escalations.

What Should You Do When You Miss a Loan Payment?

If you're worried or sure about missing a Personal Loan payment, your first step should be to stay calm. Though a stressful situation, there are steps you can take to reduce the damage. First, check your loan account to confirm the missed amount/s. Then, do the following:

1. Be Aware of Your Rights and Other Legalities

Understanding your legal rights as a borrower is crucial when facing loan repayment difficulties. The Reserve Bank of India (RBI) has established fair practice codes that protect borrowers from harassment and unethical recovery practices. Here's what you should do:

• Know Your Borrower Rights: Recovery agents cannot use abusive language, threaten you, or visit at unreasonable hours (7 AM to 7 PM only). They also cannot disclose your debt details to neighbours or relatives.
• Review Your Loan Agreement: Examine your loan terms to understand grace periods, penalty charges, and the lender's rights in case of default.
• Documentation Rights: Keep records of all interactions with lenders and agents. This documentation can be valuable if you need to file a complaint or seek legal assistance.
• Legal Protections: Under RBI guidelines, lenders must follow a structured recovery process without criminal intimidation or harassment. You can file complaints with the RBI's Banking Ombudsman if these guidelines are violated.
• Seek Legal Advice: If your rights are being violated or you're facing legal action, consult with a banking law specialist. Many legal aid societies offer free or low-cost consultations for financial matters.

2. Contact Your Lender

If you’ve missed a payment or expect financial trouble ahead, contact your lender as soon as possible. Being honest and proactive can sometimes help you avoid penalties or late fees.

Most banks and NBFCs are open to supporting borrowers who reach out early, especially those with a good repayment history facing a truly unforeseen lack of funds. You can request a one-time extension, reduced EMIs, or even a temporary pause in payments until your situation improves. Don’t wait until it’s too late; lenders are more likely to help when they’re kept in the loop.

3. Get Help from Friends and Family

RBI guidelines focus on fair practices for both borrowers and lenders, among which is a mandated grace period during which borrowers can save money to pay the missed EMI. This would be a good time to approach your friends or family for an informal (interest-free) loan to help you out. Once your financial position is steady, you can pay back the borrowed amount. 

4. Consider Debt Consolidation

If you have multiple loans or credit card debts alongside your Personal Loan, consolidation can help simplify your payments and potentially reduce your overall loan amount and interest burden. Here are a few debt consolidation options you can explore:

• Move high-interest debts to a lower-interest loan or credit card with balance transfers
• Take a consolidation loan at a lower interest rate to pay off existing debts.
• If you own property, you might consider using its equity to consolidate debts at lower interest rates.

5. Increase Your Income

Consider taking on part-time or freelance work in your spare time, such as freelance projects, consulting, or gig economy jobs like food delivery or ride-sharing. You can also monetise your existing skills through tutoring, writing, or other services. If you have spare space, consider generating rental income by renting out a room or parking space, or renting out items you own but don't use frequently.

6. Liquidate Assets

As a last resort, consider liquidating non-essential items like jewellery, electronics, furniture, or other valuables you can live without. You might also look at your investments, such as mutual funds, stocks, or fixed deposits, though you should consider tax implications and early withdrawal penalties. Secondary assets like additional vehicles, property, or collectables can also be sold, and while not ideal, using emergency savings to avoid a loan default may be necessary.

Consequences of Missed Loan Payments

Knowing what’s at stake, especially if you have trouble making payments, will help you grasp the seriousness of the situation and act quickly. Here are some of the key outcomes you may face if you default on your loan EMIs:

1. Impact on Credit Score

Any financial transactions related to loan repayments influence your credit score and are recorded in your credit report. As part of the process, lenders report your overdue payments as well as non-payments to CIBIL and other credit information companies. If you always pay your loan EMI amount on time, it'll keep your CIBIL score healthy. But if you miss an EMI or are unable to pay your loan on time, it will severely affect your credit score by dropping it.  

Your credit score is also one of the main factors that determine your loan eligibility. As a result, the impact of missing loan payments also makes it tougher for you to get a new loan.  

2. Additional and Late Fees

If you pay your EMIs late, you may incur additional charges from your lender in the form of a 'late fee' that you'll need to pay along with your EMI. 

If you delay further, you will be charged by your lender as a defaulter, and if the situation worsens, it may even lead to asset seizure, and there will be additional costs for the unpaid amount.

3. Potential Legal Implications

When you default on a Personal Loan, there could be some sort of legal implication in the form of a civil lawsuit. Legal recourse is usually taken in extreme cases, as it is time-consuming for the lender and financially taxing for both the lender and the borrower.

Negotiation and Settlement Options

If you're unable to repay your loan despite trying, you can try to negotiate the terms of the loan or consult a credit counsellor for assistance. Alternatively, you can request a loan settlement, typically allowed in serious cases like job loss or medical issues. You also have the option to take on the services of a loan settlement lawyer, who can negotiate on your behalf.

Negotiation Options: 

• Payment modifications, i.e. restructuring your loan terms, like extending your repayment period.
• Deferment lets you temporarily pause or reduce payments for a specific period.
• Loan reinstatement lets you return to your original payment schedule if you pay off all missed payments and accrued fees in a lump sum.

Settlement:

When you face a loan settlement, the lender accepts a reduced lump sum to close the loan, but it negatively impacts your credit score and stays on your report as “settled.” Do note that the “settled” status stays on your credit report for several years, impacting your ability to get approvals on future loans. 

• Debt settlement: A negotiation where you pay less than the full amount owed, typically 40-80% of the balance. It severely impacts your credit score and could have tax implications on forgiven debt.
• Lump sum settlement: A one-time payment that's less than the total balance, ideal for when you have funds on hand but not enough to manage the ongoing EMI payments.

Also Read: Can We Change the Tenure of a Personal Loan? What You Need to Know?

Tips for Managing Your Personal Loan Payments

The following are some tips to manage your Personal Loan payments:

• Make a Budget: Create a proper budget for the monthly income and expenses, cut down on unnecessary expenses, and allocate a part of your income to pay EMIs. This ensures you always have more money on hand, reflecting responsible credit behaviour. Consult a credit counsellor for a financial plan if needed.
• Choose a Flexible Tenure: Choose a flexible repayment tenure to make the EMIs affordable and manageable. It must not be too long or too short, and should take into account your repayment capabilities.
• Avoid Multiple Debts: Avoid taking multiple debts to save yourself from getting burdened with multiple EMI obligations.
• Calculate your EMI: Before taking a Personal Loan, always use the EMI calculator; enter your interest rate and tenure to get your EMI and plan accordingly.
• Automate Your EMIs: Automate your monthly EMI and credit payments to avoid defaulting or impacting your CIBIL or credit history.
• Request for Low EMIs: Requesting low EMIs helps make the monthly payments more affordable. Being able to pay with manageable EMIs minimises the chances of defaulting.
• Maintain an Emergency Fund: Maintaining emergency funds helps you pay your EMIs for your current loan if something unexpected happens to your income stream or if you face financial hardship, enabling you to maintain a good credit score despite the bump.
• Consider Part Payments: A part payment is another good way to reduce EMI payments and interest rates. If you have surplus money and an active Personal Loan, making part payments in the form of a lump sum can ease your financial burden and help avoid missed payments later.

To Conclude

As we've explained, missing a loan EMI has serious consequences, but you still have helpful options as a Personal Loan defaulter. Just ensure that you properly evaluate your financial situation and come up with a repayment plan or your next steps before pushing panic buttons.

Frequently Asked Questions

If I miss an EMI payment, will it affect my credit score?

Yes, missed payments or non-payment of an EMI will severely affect your credit score, bringing it down. Missing out on a single EMI payment will not affect your score much if you pay it later, but multiple EMI defaults may reduce your score to a great extent.

Can I pay an EMI after the due date?

Yes, many lenders provide a certain grace period that allows you to pay EMI after the due date, but with a certain amount of penalty.

How to improve my credit score after missing a Personal Loan EMI?

To improve your credit score and enhance your credit history after missing a Personal Loan EMI, you should start paying your EMIs on time, automate your EMIs, avoid actions that may involve recovery agents, and provide documentation to support any due payment obligations.

What are the consequences of defaulting on a Personal Loan?

From negatively impacting your credit score to potentially involving legal action, defaulting on loans has a range of serious consequences. After three to six months of missed payments, your account transitions from delinquency to 'default' status. Post this, the loan recovery process is initiated. 

When does a charge-off appear on your credit report?

A charge-off appears on your credit report and indicates that the lender, after multiple attempts, has given up trying to collect the money from you through your bank account.

Can debt consolidation reduce monthly payments?

Yes, debt consolidation can reduce monthly payments by taking out a new loan with a lower interest rate to pay them off.

Can I ask my lender for a revised payment plan as a last resort if I can’t repay my loan on time?

Yes, the lender may be willing to adjust loan terms or set up a new payment plan if you explain your situation. Just ensure you approach them on time.

What happens if I ignore a legal notice from the lender and don’t pay within the given time?

If you do not pay within the period mentioned in the legal notice, the lender can take the matter to court.

Will I need to provide proof of financial hardship when requesting help from my lender?

You may be asked to provide documentation of your financial hardship when contacting your lender. Ensure you always provide the required documentation to expedite processes.