Missed Your EMI Payment? Know Its Consequences

Digital loans have made credit accessible to millions of Indians. But as convenient as it is to get access to money, it is equally important to keep a clean repayment history.  

Sometimes, due to either unfortunate circumstances or poor financial planning people tend to miss their EMIs and that can lead to negative consequences on your credit profile. 

What Does It Mean to Default on Your Loan?

When you take a personal loan from a lender, you have to pay it back with interest according to your repayment plan. When you miss your EMI payment, it is known as defaulting on your loan.  

The consequences of defaulting your loan can range from a dent in your credit score to legal repercussions.

Classification of Loan Defaults

Missing out on your EMIs is known as defaulting on your loan repayments. There are two types of defaults based on the number of days past your repayment due date that you haven’t paid the EMIs.   

1. Minor Default: This happens if you don’t pay your EMI for up to 90 days. The consequences of making a minor default may be severe but you can make up for it over a period of time by repaying the overdue amount.  

2. Major Default: This happens if you don’t pay your EMI for more than 90 days. When your EMIs are in major default then your loans would be classified under “Non-Performing Assets”.  

Types of Loan Defaults

A loan default need not always be a missed EMI. There are many other types of loan defaults you should be aware of: 

Technical Default

When you violate the terms and conditions of your loan agreement, it is considered as a technical default. Some examples of a technical default are not maintaining a particular debt-to-income ratio, not providing timely financial statements, etc. depending on the agreement. 

Covenant Default 

When taking a personal loan from any NBFC or Bank, you need to adhere to certain agreements known as covenants. This kind of default can occur when you don’t meet certain requirements like maintaining a particular level of collateral, not meeting the required financial ratios, etc.  

Cross Default

Cross default is when you default on one loan which triggers a default on any other loan with the same or different lender. 

Strategic Default 

A strategic default is when you intentionally miss your loan repayment.  

Also Read: Why Opting For an NBFC Personal Loan is a Better Option?

Consequences of Missing EMI Payments 

Understanding the consequences of missing your EMIs can help you put into perspective the importance of making your repayments on time and keeping your finances on track.  

Here are 6 things that can happen to you if you miss making your repayments on time:  

1. Late Fees and Penalty Charges 

If you keep delaying your EMI payments, you will end up attracting late fees and penalty charges. The penalties vary from lender to lender and also depend on the number of days you miss your EMIs. Many lenders offer a grace period where there are no penalties in the first few days. But you need to check your loan agreement to understand the repayment policies.  

2. Negative Impact on Credit Score  

Your credit score is a three-digit number that speaks volumes about your repayment habits. Whenever you miss your EMI, your credit score gets reduced. This can negatively reflect on your credit profile for a long period of time.     

3. Reduced Chances of Getting a Loan in the Future 

You get a credit offer after the lender carefully assesses your credit profile. While different lenders have different eligibility criterion, a bad credit profile and low credit score definitely reduces your chance of getting a loan with these lenders.  

4. Account Reported to the Bureau 

If you haven’t repaid your EMIs for more than a month, then your lender can report your account to the bureau.  

When your loan account is reported to the credit bureau for non-repayment of your EMIs, it can further damage your credit profile which would limit your access to credit in the future.  

5. Account Reported as Delinquent or Defaulter 

If your account is reported as delinquent or a defaulter, it means you have failed to repay the overdue payments and have breached the loan agreement. Although being reported as a defaulter has a more severe consequence than being reported as delinquent, both significantly damage your credit profile.   

6. More Persuasive Collection Attempts  

Being constantly nudged by the recovery agents can be very annoying. But if you ignore them and continue not repaying the loan, the frequency of attempts to collect the outstanding money might go up.   

What to Do next? If You Missed Your EMI Payment 

1. Inform Your Lender Immediately

If you haven’t repaid your EMIs due to a cash crunch and the lenders are making collection attempts, inform them about your situation. You can request your lender to allow you to make part-payments or even negotiate your repayment options.   

2. Prioritize Your Repayments

Before you prioritize your repayments, take your income, expenses, and savings into consideration.  

Next, make a list of all your overdue payments along with factors like interest rates, size of the debt, minimum payment required, etc. Then decide which EMIs you want to close first.  

Read more about ways to repay your overdue EMIs here.  

3. Repay Your Loans in Part-Payments 

You can request your lender to allow you to repay your loan in part-payments. This will reduce the pressure of having to repay your loan at once.  

4. Use Your Emergency Fund or Savings to Clear Your Repayment. 

If you have an emergency fund or savings handy, then use it to close all your EMIs. This will stop further damage to your credit score.  

5. Take a Debt Consolidation Loan

If you don’t have an emergency fund or enough savings, you can consider taking an emergency loan. You can combine all your ongoing debts and overdue EMIs into a single loan and use an emergency loan to repay it. 

How to Avoid Missing Your EMIs in the Future 

1. Create a Better Financial Plan 

Creating a financial plan for all your expenses in advance can help you save money for your repayments and avoid missed EMIs on your loan.  

2. Build an Emergency Fund

While creating a financial plan can help you save money for your EMIs, it is always better to be prepared for unfortunate situations. An emergency fund can help you do that. It is money from your income you should put aside to cover at least 3-6 months of your living expenses. So even if you face any financial crisis, it won’t hamper your EMI repayments.   

3. Set Your Repayments on Auto-Debit. 

If you keep forgetting your EMI dates, you can simply set your EMIs on auto-debit. This way you can conveniently organize your finances better and avoid any kind of late payment charges.  

4. Communicate with Your Lender

If you’re going through any kind of financial crisis, then being proactive and informing your lender about it can show you’re a responsible borrower. Your lender might be able to assist you and provide a solution.  

Also Read: Taking a Personal Loan Upto 1 Lakh

Conclusion

While it can be a little tempting to take loans given how easily they are available, it is more important to evaluate your financial situation and plan your personal loan repayments.  

You can use an EMI calculator to plan your EMIs even before taking a loan. 

Doing this simple thing can help you avoid any kind of missed EMIs and maintain good credit profile.