What happens if the interest is not paid on time after taking a personal loan? What would the financial problems be if this happened? How can these problems be resolved? Find all the details here.
Many people take out personal loans for their financial needs despite the high interest rates associated with them.
However, what happens if the monthly EMIs (equated monthly installments) are not paid on time after taking a personal loan, and what kind of negative impact does this have? What should be done to prevent this from happening?
Loan Default Classification:
Major Default occurs when the borrower fails to make payments for over 90 days. This leads to the loan being classified as a non-performing asset (NPA), making it difficult to obtain further loans.
Minor Default: Non-payment of EMIs for less than 90 days is minor. Although this can negatively affect your credit score, it is often possible to recover from minor defaults.
Effects of missing personal loan EMI payments:
Credit Score Impact: Missing an EMI payment can significantly lower your credit score. Most lenders require a CIBIL score of 750 or higher. Even one missed payment can reduce your score by 50 to 70 points.
Creditworthiness: Your repayment history plays a key role in your credit reports, in addition to your credit score. Creditors will view you negatively if you have negative statements about missed payments, making it challenging to secure future loans.
Late Fees and Penalties: Most banks charge late fees for missed installments, increasing your financial burden.
Recovery Agents: If your payments are overdue by over 90 days, banks can appoint recovery agents to collect the outstanding amount. Borrowers generally receive a 60-day notice before their account is marked as delinquent.
Strategies to avoid loan defaults:
To reduce the risk of Default, consider the following strategies:
Plan your finances: Effective budgeting and financial planning can reduce the likelihood of missed payments.
Request a lower EMI: If you have difficulty meeting your EMI obligations, approach your bank. They may offer solutions such as extending the loan tenure or converting an unsecured loan into a secured loan.
Make installment payments: Making installments will reduce your EMI burden and interest rates, ensuring you can manage your expenses throughout the loan tenure.
Request an EMI-free period: If you experience temporary income disruption, approach your lender to request a grace period for EMI payments. Most banks provide three to six months of grace in such situations.
Communicate with your lender: Open communication about your financial situation can lead to mutually beneficial solutions. Some companies offer simple repayment options that can help you through tough times.
Consider Refinancing: Refinancing your loan can reduce your monthly EMIs, but lenders generally require a good credit score.