Taking a loan today is easier than ever. Commercial banks (private and public sector) along with non-banking financial corporations (NBFCs) make it quite easy for borrowers to get loans to meet their various financial needs. Additionally, you can check personal loan interest and charges on lenders’ websites as many lenders today digitally offer instant online loans within minutes or hours.
As a result, borrowers (both salaried and self-employed) take loans from their preferred lenders, without giving it a second thought. One of the drawbacks of the easy availability of loans is that borrowers fail to consider all the financial aspects of the loan, mainly about repayment and implications of non-repayment.
Personal loans are the right choice for those situations when one is in dire need of funds. They are easily available, both offline and online, without too many restrictions on the loan amount. Paying your loans on time is essential. If you do not make your payments on the due date, you are considered a loan 'defaulter'. Each lender has its own unique set of terms and conditions when it comes to non-payment of personal loans. Default on the prescribed payment may lead to certain consequences.
What Does It Mean to Default on Your Loan?
If you do not pay your loan EMI on time, you are considered a defaulter. However, keep in mind that some loan providers have what they call a 'grace period' that starts right after your EMI due date. If you pay off your loan during the grace period, you may be required to pay a late payment fee to avoid the title of 'defaulter'. Different lenders have different grace periods, as well as different fees. Note that if you miss only one payment, you will not get the title of a defaulter. However, your lender may report you as a defaulter when you miss at least a few EMIs.
Classification Of Loan Defaults
- Major defaults
Major payment defaults are those where the borrower has not made payments in more than 90 days. Most financial institutions avoid individuals who have large payment defaults on their credit reports. When anindividual payment is pending for more than 90 days, the loan account is marked under the Non-Performing Assets (NPA) group.
- Minor defaults
Loan accounts where the non-payment period is less than 90 days are referred to as minor defaults. Borrowers who have had minor defaults in their loan accounts can gradually recover from the negative impact on their CIBIL score.
The Consequence of Missing Personal Loan EMI
Here are some of the consequences when you default on paying your loan EMIs.
- Impact on credit score
Your credit score is one of the factors that determine your loan eligibility. Any financial transactions related to loan repayment are recorded on your credit report. The lender reports your overdue payment as well as nonpayment to the CIBIL. By default, on your EMI payments, you can see a slight or major drop in your credit score. Even a missed payment leads to a small drop. Once the credit score gets low it affects the loan eligibilityin such a situation, it becomes difficult for them to take loans. Therefore, it is important to pay your loan EMI amount on time. All these things harm and lower your credit score and affect your chances of being accepted the next time you apply for a personal loan.
- Additional Fees and Late Fees
If you pay your EMIs late, you may incur additional charges from your lender. If you pay your EMIs after your due date but within your lender's grace period, there is usually an additional 'late fee' that you will need to pay along with your EMI amount. If you delay further, and the grace period is exceeded, you will be charged by your lender as a defaulter and there will be additional costs on the unpaid amount.
- Potential legal implications
When you default on a personal loan, you won't necessarily be put behind bars, but there could be some sort of legal implication in the form of a civil lawsuit. This is a rare occurrence and is chosen by the lender especially when several attempts have been made to get the loan amount from the borrower. Hence, legal action is usually the last resort as it is time-consuming for the lender as well and financially taxing for the lender and borrower.
Ways to Avoid Missing EMI Payments
As you can see, missing even a single EMI can have negative consequences. So, if you have assessed whether you will be able to pay the EMIs on time before taking the loan, it will help.
Here isa list of ways to help you plan your finances better and pay your EMIs on time-
- To be proactive
If you suspect that you will not be able to pay the upcoming EMIs on time, you need to act before it is too late. Contact your lender before the due date and explain your financial situation. Check whether the lender will be able to stop the EMI temporarily. Otherwise, you can request the lender to reduce the EMI, till your financial position is fine. Most lenders honorthese requests by borrowers, especially when they have not defaulted before.
- Request to temporarily stop EMI
If you are suffering from loss of income due to layoff or job loss, you can approach your lender for help. Lenders often give pause in EMI requests, especially when the borrower is suffering from loss of income. Most of the banks offer an EMI waiver of 3 to 6 months (no EMI for the next three to six months). You can continue to repay the loan once you are back on your feet.
- Have an emergency fund
Financial advisors always recommend that you should maintainan emergency fund to dip into during a financial crisis. You should have about six months of your salary in the emergency fund. This way, you can use this fund to pay for your household expenses and EMIs if something unexpected happens to your income stream.
- Get help from friends and family
You can approach your friends or family for an informal (interest-free) loan to help you repay the EMI. Once your financial position is fine, you can later pay the loan amount to your friend.
Ways To Avoid Loan Default
While loan defaults should be avoided at all costs, some methods can be employed if the situation arises. In most cases, borrowers have someprior idea of whether they will be able to make the upcoming EMI payment or not. Following are the options that the borrower can consider.
- Plan finance better
To prevent the chances of defaulting on a loan, it is advised that borrowers plan their finances more efficiently. Before taking the personal loan always use the EMI calculator for personal loan present on the lender’s website to check how much interest rate and charges will be applied to your loan
- Request for low EMI
If the borrower is likely to default on the loan payment, they should approach the bank and inform them about their financial circumstances and request for a lower EMI. Banks usually reduce the EMI by extending the existing loan tenure or converting the unsecured loan into a secured loan. In cases where the loan is converted into a secured loan, the interest payable on the amount borrowed is also less. Out of the 2 options, converting an unsecured loan into a secured loan is ideal as the reduction in EMI is significant as compared to extending the loan tenure. Also, very few banks allow extension of the loan tenure.
Part-payment is another good way to reduce EMI payment and interest rates. However, there is another preemptive way to ensure that the borrower can make EMI payments for the entire loan tenure. If the borrower has surplus funds and an active personal loan, making part payments can ease the financial burden.
Understand your finances carefully before applying for a loan. With the easy availability of credit, getting a loan can be tempting. However, before applying for a loan, you need to carefully evaluate your financial situation and decide whether you will be able to afford it. Missing loan EMI has many negative consequences. So, always rememberto pay your EMIs on time.