Consequences Of Non-Payment Of EMI And Ways To Avoid It

Non-payment of EMI or defaulting on a loan means that you have not been able to stick to the repayment terms. It indicates your failure to satisfy the legal obligations of a loan. For instance, if you take a home loan and don’t make the mortgage payment on time, it means that you have defaulted. Defaulting can mean avoiding an EMI payment completely, missing it, or making a late EMI payment. And these can have serious consequences and affect your your credit score in a very negative manner. Consequently, a bad credit score can spoil your chances of getting a different loan in future. So, read on to know more about the consequences of non-payment of EMI and how you should avoid such a situation.

Consequences of defaulting on your loan re-payment

1. General Consequences

1. Late payment fees and penalties – If you are late in paying your EMI, a late fee will naturally be charged which can be pretty high or your interest rate can get inflated with penalty charges.

2. Loans Interest rate increase in case of credit card payments (unsecured loans) – For unsecured loans which are given to you without any collateral, like personal loan or credit cards, the interest rate might shoot up when you miss an EMI payment or get late.

3. Collection agents – Usually, after 90 days of non-payment of EMI, your account will be given a default status by the lender, and the collection department will be notified. After 120 days, the lender will delete your account from its books but you will still have to pay back the loan amount to the collection department. And collection agents may pressurize defaulters to repay the loan, through repeated calls, mails and personal visits.

• Drop in credit score – Defaulting a loan will negatively impact your credit score, which will show other lenders that you are not sufficiently credit-worthy. Or in other words, a poor credit score will show that you cannot repay loans properly.

• Reduced future loan eligibility – Since the non-payment of an EMI can reduce your credit score, it will hamper your chances of getting any other loan in future. This is because the credit score will show that you don’t have a good record of paying back loans.

• Legal proceedings – In case you don’t pay back the debt collection agency after their repeated demands, your case can be taken to court, and an attorney might issue a letter that acts as a final warning for you to pay back your debt. In case the debt is considered valid by the court, you will be ordered to pay it along with legal fees. Moreover, your default will become public news. The court can also allow the lender to put a lien on your collateral property, and if you decide to sell it, you might have to pay off the debt partly or completely with the proceeds.

• Stressful times – A loan defaulter loses his or her peace of mind as collection agents are constantly after them to pay up. Moreover, he or she is constantly afraid that some legal action might be taken against them.

2. Consequences in case of secured loans

• Repossession of collateral – In secured loans, the borrower provides collateral in the form of a house, factory, land or vehicle, against the loan amount. So, if he/she defaults on the EMI payment, then the bank can repossess the collateral. In case you have taken a loan against property, the bank will usually give you 60 days’ notice to settle your debt, before repossessing your house. In case of a two-wheeler loan or car loan, you will get a notice of 7 to 15 days to settle your dues, before the bank repossesses your vehicle.

2. Auction/Resell your collateral – After repossessing a house, the bank can proceed to sell it if the debtor doesn’t pay back the loan against property in 30 days. The bank will inform the debtor about the venue, date and time of sale, and if the sale value exceeds the loan amount, the balance will be refunded to the debtor. In case of a two-wheeler or car, the bank will proceed to sell the repossessed vehicle, if the debtor doesn’t settle his dues in 7 days. In case the repayment is still not made, the vehicle will be sold at an auction within 90 days from the repossession date.

3. To avoid repossession, payment of entire amount as well as additional charges is mandatory. And that too within the stipulated time period, depending on the type of loan.

3. In case of Bankruptcy

You might consider bankruptcy as a solution when you cannot repay a loan, but it can be an unwise move too. You might think that by filing bankruptcy you can prevent creditors from pursuing you, but in case you are filing it for a secured loan, the lender can repossess your home, car, land or other collateral and sell it off to recover the loan. Also, after filing bankruptcy, it will take you a lot of time to rebuild your credit history and score. It will be quite some time before any lender will again consider you for a loan.

How to avoid defaulting on a loan?

1. Budget Carefully – Prepare a budget every month so that you can reserve enough money to pay your EMIs without fail. Not having a budget can make you lose track of what are your important obligations.

2. Plan your expenses – Decide how much you can spend so that you have enough money left over to pay your EMI. Avoid frivolous expenses if need be, like a massive TV or the latest home theatre or expensive dresses, till the loan is paid off.

3. Maintain contingency fund – You must definitely reserve some money for emergency situations, like if you lose your job but still have a loan to pay off. A contingency fund will help you pay off EMIs even when you don’t have a regular source of income.

4. Plan your EMIs – If you have taken multiple loans, make sure you pay off the larger EMIs first and then the others. It will be easier for you to decide how much to save from your income. In other words, pay off EMIs with higher interest rates like in personal loans or credit cards, before you pay off others.

Summation and Conclusion

It is not difficult to gauge how serious defaulting on a loan can be from what has been discussed above. It can hamper your credit score, destroy your credit-worthiness, and tarnish your reputation if your default case is taken to court, and you can lose your house, land or vehicles, if the lender repossesses your collateral in case of secured loans. So, it is wisest to pay EMIs on time and to plan income and expenditure always in a manner that leaves you with enough money to pay off debts.