Personal loans are unsecured loans, which you may opt for financing your big purchases, home renovations, investing in assets, etc. These are quick personal loans with minimal documentation requirements and a flexible repayment term that ranges from 1 year to 5 years.
You have the option of choosing your repayment tenure that would be the most convenient for you. However, there are times when you might have trouble paying the monthly EMI. Missing out on 1 or 2 EMI payments may not be a big deal, but it can have a few effects on your credit health. If you cannot make your loan EMI payment, your lending institution considers you a defaulter.
Classifications of loan defaults
There are two types of loan defaults that banks and financial institutions classify, and you might fall into any one of these categories:
- Major defaults: These are major payment defaults, where you exceed 90 days after missing your loan EMI payment. It means you have not made a payment in more than 90 days and the lending institution considers you as a major defaulter. The drawback of falling into this category is that financial institutions avoid granting loans to individuals with major payment defaults in their credit reports.
- Minor defaults: These are minor payment defaults, where you don’t exceed 90 days after missing personal loan EMI payment. It means you make the EMI payment within 90 days after your scheduled date. Note that minor defaults can still have an impact on your credit score.
What happens if you miss personal loan EMI payments?
Here are some of the consequences of defaulting on loan EMI payments.
- Low credit score: Your credit score determines your loan eligibility. Therefore, the first consequence of defaulting on your EMI payment is a decrease in your credit score. Most lending institutions and banks require a credit score of 750 or more for borrowers to apply for an instant personal loan. So, even if you miss one of your EMI payments, your credit score can drop by 50-70 points.
- Low creditworthiness: All the information regarding your debt repayments is in your credit report, which can depict your repayment history. So, even when you have a credit score above 750, you can have low creditworthiness because of the comments about your payment defaults in your credit report. Therefore, the negative comments in your credit report might lead to loan rejection.
- Late fees and extra charges: Another consequence of defaulting on your loan EMI payment is the additional charges or late fees that your lender may levy along with the EMI payment. The late fee penalty is usually 1-2% of the due EMI amount.
- Reduced future borrowing capacity: The lender assesses your credit report and credit score before providing you with a personal loan. However, defaulting on your loan EMI payment will create a wrong impression on the lender, who will then be hesitant to loan you the money, which reduces your future borrowing capacity.
- Recovery agents: When you are not paying your loan EMI even beyond 90 days after the scheduled due date, then the last option for the lender or banks is to send agents to recover your loan amount. The bank usually will issue a 60-day prior notice to the borrower before declaring the loan account as an NPA.
Ways to avoid loan defaults
Of course, you must always try to avoid missing out on your loan EMI payments. However, the future is uncertain and situations can arise where you cannot pay your EMI on time. To avoid these, here are a few ways that you can consider before applying for a personal loan.
- Plan your finances in advance: To avoid defaulting on your loan EMI, it is better to plan your finances in advance. You can use a personal loan EMI calculator to calculate multiple factors like interest rate and choose an EMI plan before applying for a personal loan.
- Request for lower EMI: If you believe you will not be able to make the EMI payment on the scheduled date, then you must communicate with the lender about your financial situation and request them to lower your EMI. The banks and lending institutions usually reduce the EMIs by extending the tenure of your loan repayment or convert the unsecured personal loan to a secured loan.
- Request to make part payments: You can request your lender to allow you to make part payments, which is going to reduce the EMI and the interest payable by you every month.
- Request for EMI-free period: Banks and lending institutions can usually offer EMI-free periods to borrowers who have lost their jobs or are not running their business operations temporarily. You can get a 3-6 month waiver on your EMI payment from your lending institution.
It is crucial to plan your finances in advance in order to avoid defaulting on your EMI payment. With the easy availability of quick personal loans, you need to correct assess your repayment capacity and then apply for a personal loan.
FAQs on personal loan default
What happens if 4 EMIs are not paid?
If you miss paying 4 consecutive loan EMIs, the lender can declare your loan as default and recover the funds or take legal action against you. Before all this happens, the lender will get in touch with you, so you can plan an alternative path for the repayment such as restructuring the loan.
What are the rights of personal loan defaulter?
The rights of a loan defaulter include the rights to sufficient notice, to be heard, to get humane treatment and to report grievance.
What happens if EMI is not paid on time?
If you do not pay EMIs on time, you will need to pay a late payment fee and you can also face a dip in the credit score by 50 or 70 points every time you miss an EMI. If the 3 consecutive EMIs are not paid and do not get in touch with the lender, then you may have to go through legal action or have to deal with recovery agents.
How to pay personal loan EMI?
You can pay your personal loan EMIs online through net banking and other payment modes. You can also opt for an auto debit mandate which will help you not to miss any EMI and pay on time.
What happens if I default on my personal loan in India?
If you default on a personal loan, your credit score decreases and it will be challenging for you to get a loan in the future. The lender may also start legal proceedings against you and declare your loan as a non-performing asset.