Thanks to digitalisation of banking services, today it is possible to get a personal loan approved within minutes. Due to this benefit, many of us avail of these loans for our most basic needs, without understanding the dire consequences of unnecessary borrowing. Taking on too much debt, more than you can afford to repay, may lead to delay in repayment of your loan EMIs (Equated Monthly Instalments). But the consequences of this can be severe and it can have devastating effects on your financial well-being.
What happens when your EMI bounces?
EMI bounces are defaults on your loan payments, and they come in two forms:
- Major Defaults: When you fail to make an EMI payment for a significant period, typically 90 days or more, your lender classifies your loan as a non-performing asset (NPA). This classification can lead to further categorisation, such as loss assets, doubtful assets, or substandard assets, based on the likelihood of recovery.
- Minor Defaults: On the other hand, minor defaults occur when you miss EMI payments for a period of fewer than 90 days. These can be less damaging if you take timely measures and pay your EMIs on time.
What is the impact of a late loan payment?
1. Your creditworthiness is impacted:
Missing more than three consecutive EMIs can significantly harm your credit score. The late payments are reported to credit bureaus and can stay on your credit report for several years. This will affect your ability to borrow in the future, making it difficult to secure loans for various purposes. It can also affect your chances of transferring the balance of loans like home or car loans to reduce interest rates as well as your ability to receive another loan from any other lender.
2. Your amount payable increase:
Each missed EMI incurs a penalty, typically around 2-3% of the missed amount. This penalty is applied monthly and can accumulate over time. If you continue to miss EMIs regularly, the interest and penalties can substantially increase the total amount you owe at the end of the loan term.
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3. You take on the risk of losing assets:
While personal loans are generally unsecured, some lenders may require collateral if the borrower fails to meet certain criteria. Collateral can include valuable assets like investment documents, vehicle papers, or even jewellery. If you regularly bounce your EMIs, the lender may seize your assets to recover their losses.
4. Banks charge you a higher interest:
Your credit report, which is negatively affected by late payments, plays a significant role in determining the interest rates you are offered. Even if you have a good income and a low debt-to-income ratio, your future loan applications could be denied, and if approved, you are likely to face higher interest rates.
5. You could be under legal pressure:
When personal loans are unsecured, the lender's last resort for recovery is often legal action. Depending on the outstanding amount and other factors, this can lead to bankruptcy, which has a host of negative implications. This could include restrictions on future borrowing, difficulty in obtaining insurance claims, starting a business, or finding rental properties.
Also Read: [Smart borrowing: know when to use a Personal Loan]
Conclusion
Late loan payments have serious consequences. They impact your credit score, increase the amount you owe, risk your assets, and can potentially lead to legal action. To avoid these negative outcomes, it's crucial to repay your EMIs on time. If you've missed a payment, take immediate steps to rectify the situation, such as increasing your EMI payments or even considering loan prepayment.
Maintaining a healthy financial record by timely repaying your loans is key to securing a financial future.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision