Know the pitfalls of missing your EMIs

On delaying an EMI, the bank will charge you a penalty and your credit score will be adversely affected

Know the pitfalls of missing your EMIs
The penalty charge may vary depending on the type of loan instrument. Banks may also levy penal interest over and above the normal interest when the EMI is delayed.

Digital banking has made it extremely easy to get loans. While it is easier to avail funds, repayment of the same should be your priority. Delay in repayment of EMIs can have serious repercussions on your financial health. Here is what happens when you delay your EMIs.

Penalty charges
On delaying an EMI for more than a month, the bank may charge you a penalty of1% to 2% on the overdue instalment, subject to minimum and maximum amount that varies from bank to bank. The penalty charge may vary depending on the type of loan instrument. Banks may also levy penal interest over and above the normal interest when the EMI is delayed.

NPA classification of your account
Banks categorise EMI default into two categories: minor default and major default. EMI delay up to 90 days comes under the minor default category, whereas missing three consecutive EMI payments is a major default. In case of minor default, banks levy penalties, send reminder notices and report the delay to the credit bureaus. In case of a major default where neither principal nor interest is serviced for 90 days, the bank may consider your loan as Non-Performing Asset (NPA) and initiate a recovery procedure against you. Before marking your loan as NPA, the bank sends a notice to you. If you deposit the requisite amount within the time-frame mentioned in the notice, you can avoid your loan from turning into an NPA. Some banks involve a third-party recovery agent that may bother the defaulting borrower to repay the loan.

Impact on credit score
Missing a single EMI can decrease your credit score by around 50 points, depending on the type of loan and other factors. Adhil Shetty, CEO, Bankbazaar, explains, “Reinstating the EMI and taking corrective measures can gradually improve your credit score, but your credit report may still reflect the delays in payment. If your loan is classified as an NPA, it can damage your credit score. The NPA is reflected in your credit report, significantly reducing your capacity to take a new loan in the future.”

Settlement of outstanding loan amount
Once your loan is declared NPA, the bank may give you options to repay the entire outstanding amount, including interest and penalties, or settle the loan that often waives off the interest and penalties. Loan settlements may look financially easy, but they can leave a long-term scar on your creditworthiness. Lenders will not be inclined to give you fresh loans if you have a ‘loan settlement’ in your credit report. Hence, try to get a time extension or a loan restructuring from the lender if your loan is categorised as an NPA or it is on the verge of becoming an NPA.

How to avoid delays in EMI payment
It is always better to plan your loan repayment to avoid trouble at a later stage. Instead of letting your loan become an NPA, explore options like liquidating some of your low-return investments. Having a robust emergency fund can come in handy to overcome such financial difficulties.

Sometimes the lender may allow you some relaxations such as extension in repayment tenure, loan restructuring, etc. Avoid taking too many loans at the same time.

Also avoid taking a loan to repay another loan as it may lead to a debt trap, and you may find it harder to recover from it. If you find it difficult to repay the EMI, you may at least service the interest to avoid your loan being classified as an NPA.

Loan defaults
* On delaying an EMI for more than a month, the bank may charge you 1-2% penalty on the overdue instalment
* Missing a single EMI can decrease your credit score by around 50 points, based on the type of loan and other factors
* If you can’t pay the EMI, service the interest to prevent the loan turning into an NPA
* Try to liquidate some of your investments to repay the outstanding loan amount

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