Obtaining a loan has never been simpler. Borrowers can receive a loan to suit their diverse cash demands from commercial banks (both private and public sector) and non-banking financial companies (NBFCs). In addition, a number of digital lenders now provide instant online loans that may be obtained in as little as a few minutes.
While obtaining the loan amount is simple, for many of applicants, repaying it on time is a challenge. It is possible that one’s finances will be stretched at some point in one’s life. Job loss, major breadwinner sickness, family strife, and unexpected expenses all affect EMI payments.
Loan Default Prevention Techniques
The borrower has the following choices to consider.
- Inquire about a reduced EMI
If the borrower anticipates defaulting on a loan payment, they should contact the bank and explain their financial situation, as well as request a reduced EMI. Banks frequently reduce EMIs by extending the current loan term or converting an unsecured loan to a secured loan. The interest due on the borrowed amount is also cheaper when the loan is converted to a secured loan. Converting an unsecured loan to a secured loan is the better of the two alternatives because the EMI savings is large when compared to extending loan terms. In addition, only a few institutions allow loan terms to be extended.
- Request for an EMI-Free Period
The borrower can approach the bank and seek an EMI-free period if there is a gap in the flow of revenue. When customers lose their jobs or have to temporarily halt their company activities, banks frequently comply with such requests. Customers receive a 3- to 6-month EMI payment waiver from the bank, after which the borrower must restart EMI payments.
- Improve your financial planning
Borrowers should organise their money more effectively to reduce the risk of defaulting on a loan.
- Part- Payments
Another smart strategy to reduce EMI payments and interest rates is to make part payments. This is, however, another preventative measure to ensure that the borrower is capable of paying EMI payments for the duration of the loan. When a borrower has extra cash and a personal loan that is still ongoing, making a partial payment might help relieve financial stress.
What does defaulting on a Loan means?
You are a defaulter if you do not pay your loan EMIs on time. However, bear in mind that some loan providers provide a ‘grace period,’ which begins the day after your EMI is due. If you pay your loan during the grace period, you may be charged a ‘late payment’ fee to avoid being labelled a ‘defaulter.’ The length of this grace period varies by lender, as do the costs. You will not be labelled a defaulter if you miss just one payment. You may not be considered a defaulter if you miss just one payment.
Most debtors will default on their payments in one of two ways. The first is the ‘real defaulter,’ who misses payments on occasion but mostly pays their EMIs on time. A medical emergency, job loss, or other unanticipated situations may be the cause of occasional late payments. This person will most likely be offered a grace period if they explain their reasons to their loan provider. The second method a borrower might default on a payment is if they take an imprudent approach to loan repayments. In the latter case, one forgets due to carelessness rather than genuine financial concern.
Consequences of Missing Personal Loan EMI Payments
1. CIBIL Score
The most obvious consequence of defaulting on loan payments is a decrease in your credit score. Most lending agencies require borrowers to have a CIBIL score of 750 or more to be eligible to apply for a loan. Missing even 1 EMI payment can result in the borrower’s credit score dropping by 50 to 70 points.
2. Loss of assets as Collateral
When you apply for a personal loan, almost always there is no collateral asked of you as you are choosing an ‘unsecured’ loan. However, while personal loans are unsecured, in certain cases, the lender may request that you offer some security of yours as collateral. Loan providers can sometimes request the name of a ‘guarantor’ whose contact serves as a kind of collateral. Defaulting on your EMIs will most likely land your guarantor in some kind of trouble as well. When you default on any ‘secured’ loan, you lose the security that you have pledged against it.
3. Credit Worthiness
Apart from the credit rating, a borrower’s credit report also has comments about the individual’s repayment history. Very often even if the borrower’s CIBIL score is above 750, the comments about payment defaults in the credit report are often the reason for personal loan rejection. Most lenders view these comments in the credit report and mark such individuals as risky borrowers who will not be able to abide by the repayment terms of the loan.
4. Late Fee Penalties
Several lenders levy late fees penalties when a borrower misses paying an EMI on time. The penalty charged is usually around 1% to 2% of the EMI. You have to pay the missed EMI along with the penalty and the next month’s EMI, in the next cycle.
5. Recovery Agents
As a last resort, banks and financial institutions may sometimes send agents to recover the loan amount when the default period has extended beyond 90 days. The bank initially issues a 60-day notice to the borrower before the loan account is tagged as an NPA. This is a situation that is best avoided since it can be quite stressful.
6. Reduced Future Borrowing Capacity
The next time you apply for a personal loan, the loan provider carefully assesses your credit report and score to get an idea about your financial stability as well as the risk involved in providing a loan to you. In some cases, your score may be so low that you simply do not meet the requisite personal loan eligibility criteria. When you apply for a loan with a low credit score, your lender is likely to believe that you are negligent with respect to paying EMIs on time. Hence, the lender will hesitate to loan you money. Even if an exception has been made for your late payments by your previous loan provider, it is difficult to make these details clear to your new lender. They may not be aware about the reasons behind your late payments and are likely to play it safe and loan you a smaller amount than you requested.
7. Legal Implications
You won’t necessarily be imprisoned if you default on a personal loan, but you may face legal consequences in the form of a civil suit. This is an uncommon event, and the lender will use it if the borrower has failed to repay the debt. As a result, it is a lender’s last resort, and for the borrower, it becomes an enormous financial burden.