Getting the required financial support makes your life easier by fulfilling your distinct financial needs. Several banks and NBFCs (Non-banking Financial Institutions) offer funds with favourable terms. They also allow you to check Personal Loan interest and charges on their official websites, and you can easily apply for instant online loans within minutes or hours.
But sometimes, easy availability of loans makes borrowers take loans without having second thoughts, which may lead to failure in loan repayment. As a result, you, as a borrower, have to face the consequences of non-repayment or default. This blog tells you about the types of loan defaults and their consequences. Read on!
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, 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 you have not made payments for more than 90 days. Most financial institutions avoid lending to individuals with significant payment defaults on their credit reports. When an individual payment is pending for more than 90 days, the loan account is marked under the Non-Performing Assets (NPA) group.
- Minor Defaults
Loan accounts with less than 90 days of non-payment period are referred to as minor defaults. If you have a minor default on your loan account, you can gradually recover from the negative impact on your CIBIL score by paying off the due amount.
Types of Loan Defaults
Loan default occurs when you fail to fulfil your financial obligation to make timely payments of loan or amount borrowed. Different types of loan defaults can occur, each with its own implications. Some of them are as follows:
1. Payment Default
This occurs when you fail to make scheduled loan payments on time. It can happen due to financial difficulties, lack of funds, or irresponsibility.
2. Technical Default
This type of default occurs if you violate the terms and conditions of the loan agreement. It could include breaching certain covenants, such as maintaining a certain debt-to-income ratio or providing timely financial statements.
3. Covenant Default
Loan agreements often have specific clauses or covenants that you must adhere to. Covenant default happens due to failure to meet requirements, such as not maintaining a minimum level of collateral or failing to meet specific financial ratios.
4. Cross Default
This type of default occurs due to default on one loan, triggering a default on other loans they have with the same lender or multiple lenders.
It's important to note that loan defaults have serious consequences, including damage to your credit score, legal actions, and potential loss of assets.
Also Read: What Happens To A Personal Loan If The Borrower Dies?
3 Consequences of Missing Personal Loan EMI
Here are some of the consequences when you default on paying your loan EMIs.
1. 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 in your credit report. The lender reports your overdue payment as well as nonpayment to the CIBIL as well as other credit information companies. If you miss any EMI or fail to repay the loan on time, it will drop your credit score. Therefore, you must always pay your loan EMI amount on time to keep your CIBIL or credit score healthy.
2. 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. There is usually an additional 'late fee' that you will need to pay along with your EMI amount. If you delay further, you will be charged by your lender as a defaulter and there will be additional costs on 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 action is usually the last resort as it is time-consuming for the lender and financially taxing for the lender and borrower.
Ways to Avoid Missing EMI Payments
Here is a list of ways to help you plan your finances better and pay your EMIs on time-
1. Be Proactive
In case you are not able to pay your EMIs, contact your lender before the due date and explain your financial situation. Request the lender to temporarily stop or reduce the EMI until your financial position is fine. Most lenders honour these requests from borrowers, especially when they have not defaulted before.
2. Have an Emergency Fund
Financial advisors always recommend that you should maintain an emergency fund to deal with financial crises. Maintaining emergency funds helps you pay your EMIs if something unexpected happens to your income stream.
3. 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 borrowed amount to your friend.
4. Plan Your Finances Better
To prevent the chances of defaulting on a loan, it is advised that borrowers plan their finances more efficiently. Before taking a 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.
5. Request for Low EMI
Requesting low EMIs makes the monthly payments affordable for you. This also minimizes the chances of default as you need to pay with manageable EMIs.
6. Consider Part Payments
Part-payment is another good way to reduce EMI payment and interest rates. If you have surplus funds and an active Personal Loan, making part payments can ease the financial burden.
Also Read: Can We Change the Tenure of a Personal Loan? What You Need to Know?
Tips for Managing Your Personal Loan EMI Payments
Following are some tips to manage your Personal Loan EMI payments:
- Make a Budget: Create a proper budget for the monthly income and expenses and portion out a part of your income to pay EMIs.
- Choose a Flexible Tenure: Choose a flexible repayment tenure to make the EMIs affordable and manageable.
- Avoid Multiple Debts: Avoid taking multiple debts to save yourself from getting burdened with multiple EMI obligations.
- Automate Your EMIs: Automate your monthly payments to avoid missing any of your EMI payments.
Common Mistakes to Avoid When Making Personal Loan EMI Payments
You should avoid these mistakes while making Personal Loan EMI Payments:
- Ignoring to Include EMIs in Budget: Never avoid budgeting your EMIs, instead make it an essential element of your budget.
- Wrong Due Date: Choose a due date by which you will be able to make your monthly payments.
- Wrong Repayment Tenure: You must choose a repayment tenure according to your financial comfort. It must not be too long or too short.
To Conclude
Understanding your finances carefully is essential before applying for a loan. With the easy availability of credit, getting a loan can be easy and convenient. 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 remember to pay your EMIs on time. You must allocate a portion to pay your EMIs, automate the same, and choose loan terms that suit your financial situation.
Frequently Asked Questions
- If I miss an EMI payment, will it affect my credit score?
Yes, if you miss EMI payments, your credit score will be dropped. 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 EMI after the due date?
Yes, many lenders provide a certain grace period that allows you to pay EMI after a 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 after missing a Personal Loan EMI, you should start paying your EMIs on time, automate your EMIs, pay off any due payment obligation, etc.