Taking a loan has become very easy in the digital age. Borrowers can get personal loans in a matter of a few minutes. This ease of availability with multiple choices present around, can cause you to take multiple loans with very low EMIs.
However, there are consequences if EMI payments are delayed. Here is a list of things that can be impacted due to late payment of EMIs:
Consequences of late payment of loans
Banks stick to their protocols when a borrower fails to make an EMI payment. Initially, banks send text messages, emails, or phone calls to remind borrowers of their obligation to make timely loan EMI payments. If this is the first time you miss your EMI, your bank can provide you with a flexible repayment option.
If the borrower doesn't respond, these reminders become more assertive. After 120 days, the bank can send a letter of demand asking for the balance amount in full as a single payment.
Here is a list of things that can be impacted due to late payment of EMIs:
Low CIBIL score and questionable creditworthiness
One of the most immediate repercussions of delayed EMI payments is a substantial drop in the borrower's credit score. Even missing a single instalment can lead to a decrease of 50 to 70 points in your credit score. Most financial institutions favor applicants with a high credit score, which is around 750.
As a result, future loan approvals can become challenging. This also raises questions about your financial integrity and creditworthiness. Banks can categorise you as a high-risk borrower with a likelihood of defaulting on loan repayment terms.
Penalties and fees
Many financial institutions impose penalties on individuals who miss their EMI payments. These penalties can be late fees or higher interest rates applied to the outstanding EMI amount, typically ranging from 1% to 2% of the EMI.
Missing EMI payments or making delayed payments can lead to an increase in the interest rate applicable to your ongoing loan. The bank may impose additional fees and penalties, exacerbating the overall loan burden.
Legal Action
When the bank exhausts all other avenues for debt recovery, they may resort to legal action. The financial institution, whether a bank or NBFC, initiates a lawsuit against the borrower for defaulting on the loan agreements. The case is then brought before a court of law and resolved when the borrower settles the outstanding debt along with legal fees and associated charges.
How to pay back loans on time?
Ideally, avoiding loan defaults is the primary goal. However, when borrowers face extreme situations, they can maintain open communication with the bank. If a borrower anticipates that they might miss an EMI payment, they should discuss options with their bank, such as requesting a lower EMI or a grace period.
Banks can accommodate these requests by extending the loan tenure, adjusting the interest rate, or converting an unsecured loan to a secured one.
Also Read: Understanding how a loan repayment schedule works
Can filing for bankruptcy provide solutions?
Filing for bankruptcy is a drastic measure and should be reserved for the most severe financial crises. Even after declaring bankruptcy, the possibility exists that the bank can still claim ownership of the borrower's pledged assets.
The repercussions of filing for bankruptcy can affect the borrower’s credit score severely and are not easy to rectify.
Conclusion
Taking out a loan can be a challenging endeavor, and if one is unable to repay the EMIs, it can create a stressful situation in life. However, succumbing to these pressures is not the solution. Instead, adopt a proactive approach by carefully assessing your income and expenses
Focus on areas that can generate an additional income stream, reduce unnecessary costs, and ensure that you pay back your EMI obligations. It is also advisable to initiate a constructive dialogue with your bank well in advance rather than postponing the issue.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
