What Will Happen If A Personal Loan EMI Bounces?

What happens if the personal loan EMI is bounced?

1. Impacts credit score

   Defaulting on more than three consecutive EMIs has a long-term impact on your credit score. The skip is recorded on the report and stays there for several years. As a result, your future borrowing will be severely impacted. Furthermore, if you have a home or used car loan and want to transfer the balance to lower your interest rate, the new lender will not accept your application.
    

2. Raises the amount payable

   Each missed EMI incurs a penalty, which can range between 2-3% of the missed amount. This penalty is assessed on a monthly basis. If you continue missing your EMIs on a regular basis, the interest penalty will significantly increase the total amount payable at the end of the loan term.
    

3. Loss of Asset

   Personal loans are not collateralized, but in some cases, where the applicant fails to meet the minimum qualifying condition, the lender approves the loan after the borrower put in some valuables as collateral. These valuables can include anything from investment documents to vehicle papers to jewellery. If the preceding example applies to you and your EMIs are regularly bounced, the lender may seize your asset to recoup their losses.
    

4. Higher Interest Rate

   The interest rate on your borrowing is primarily determined by your credit report, which has already been deteriorated by your regular EMI skips. Even if you have a good income and a lower debt-to-income ratio in this situation, you will be denied a loan in the future, and if approved, your interest rate will be higher.
    

5. Legal Action

   Since this loan product is not secured, the lender's last resort for recovery is to take the defaulter to court. In such a case, depending on the outstanding amount and other factors, you may be forced to declare yourself bankrupt. And bankruptcy means not only restrictions on future borrowings but also difficulty in obtaining insurance claim approvals (if the situation arises in the future), difficulty in starting a business in your name, and difficulty in finding a property to rent.
    

How can I avoid an EMI default?

• Plan your budget

  Always have a full-fledged repayment plan before you apply for funding. Cut down your extravagant spending, limit your dining at expensive restaurants, and reduce your travel frequency. Use a personal loan EMI calculator to determine how much money you must set aside each month for repayment.
   

• Investment

  You can invest in schemes where the returns either exceed your loan interest rate. Also, ensure that the investment returns are paid out monthly or quarterly. This makes repayment simpler. Corporate bonds, mutual funds, and stock SIPs are some investment options you may consider.
   

• Automate payments

  Make sure to automate your repayment. This ensures that as soon as your salary is credited, the first thing that is debited is your loan EMI.
   

• Communicate with the lender

  If you are having difficulty managing your finances, you should discuss this with your lender. If you explain your situation clearly to the lender, they may be willing to reschedule the loan terms by extending the repayment period.
   

• Balance transfer

  It entails transferring the outstanding personal loan balance to the new lender. Make sure you apply for a balance transfer before the EMI skip situation arises. The interest burden is reduced by transferring the outstanding balance, making repayment easier.

Conclusion