Buying a new house is like a dream come true for many of us. But this dream can turn into a nightmare if you delay your home loan repayments. A home loan is one of the cheapest and easiest ways to arrange the fund for buying residential property. There are varieties of home loan products available in the market today, and you may choose the best one that suits your needs.
Taking a home loan may look like a walk in the park but timely repayment of the same requires careful financial planning. Delayed repayments of home loan EMI can impact the borrower in many ways. Here is a list of outcomes and solutions to handle delay in repayments of your home loan.
Delay Penalty And NPA Account
If you delay repaying your EMIs for three successive months, it is considered a minor default. In this case, the lender may start sending you reminders for payments. But the problem starts when this delay extends. A more than 3-month delay is categorised as a major default. The lender can initiate the process of auctioning off your property to recover dues under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
On delaying an EMI, the first action that any lender normally takes is to impose a penalty that ranges around 1% to 2% pm on the outstanding EMI and is subject to a minimum prescribed amount. On committing a major default, the bank can mark your loan as an NPA and later initiate a recovery procedure. Usually, the banks send a notice before they mark a loan as an NPA. Sometimes the banks involve third-party agents to recover their money from NPA accounts, which can also cause borrowers some embarrassments. That said, it is in the interest of both the lender and the borrower to find a way to repay the dues. Also, the borrower, even if in default, is owed respectable behaviour. Any coercion or intimidation can be held against the lender. The NPA will have a cascading effect on the borrower’s relationship with the lender. If the borrower has availed any other loans from the same lender, those loans may also get tagged as NPAs despite timely EMI repayment towards them.’
Impact on Credit Score
Irregular repayment of home loan EMIs impacts the credit score negatively. If the borrower often misses the EMIs, it may bring down the credit score to a very low level. Nowadays most banks reset their loan interest rate at regular intervals wherein they renew the applicable interest rate based on the prevailing REPO rate and the risk premium calculated based on the credit score of the borrower. So, a lower credit score may result in a hike in the loan interest rate for the undisciplined borrowers. On a major default, the bank reports such account to the credit bureaus and the NPA is reflected in the borrower’s credit report. It can significantly hurt the borrowers’ creditworthiness and diminish their future borrowing capacity as well.
Rejection of Transfer and New Loan
If you want to transfer your home loan to any other bank or financial institutions, the new lender may reject your application due to poor repayment history. Such borrowers may also find difficulty in getting a new loan in other categories such as personal loans, car loans, etc.
How To Avoid Delay Payment of Home Loan EMIs?
If you are facing a temporary liquidity issue, you may borrow money from your friends or relatives to repay the EMIs. Another option is to take an OD (overdrafts) against your FDs or life insurance policy to repay the loan EMI. However, you must deposit money back in the OD or return the money to your friend/relative once your liquidity situation settles down and becomes normal.
But if you are facing an uncertain liquidity setback, you can liquidate some of your low-interest investments such as FDs or liquid funds to repay EMIs on time. You can also consider withdraw from your PF contribution or from long-term investments such as Public Provident Fund (PPF) to arrange funds to avoid a home loan default.
If financial recovery looks impossible, you may explore taking serious financial actions such as selling your home and shifting to a smaller home or on a rented property to save some money, or you may think of selling your movable assets like gold, car, etc. to avoid a loan default.
Also, you may buy a loan insurance plan to cover your EMIs for a short period. Some banks and financial institutions offer these loan insurance plans at the time of loan disbursal. This can be helpful in case of job loss or a temporary loss of income when you are unable to pay your EMIs.
Create sufficient emergency funds to ensure adequate liquidity for timely payment of loan EMIs in adverse financial situations. Planning before taking a loan helps you avoid missing an EMI. You can focus on aspects like taking a loan as per your repayment capacity, you can take the loan for a longer tenure to keep the EMI lower and you may avail the moratorium period before starting the EMI payment to get yourself financially prepared before the EMI starts.
It is also advisable to stay touch with your lender and work out a solution. Depending on your case, the lender may offer your options like loan restructuring, grace or moratorium period and the loan settlement where the interest rate is reduced as per the rules to lower your burden.
(The author is CEO, Bankbazaar.com)