Defaulted on your EMIs? Here is what you should do now

4 MinsMay 11, 2020

What if you have taken a loan from a bank and have missed paying the EMI? If for some reason the funds in your account are insufficient, then your EMI does not get debited on the due date. You will receive a reminder from your bank, via phone call or email, asking you to pay the dues. In many cases the bank allows a few days grace period during which you can pay the instalment. Following this grace period, the bank may charge you a late payment fee. It will be considered a default if you miss the EMI by three months or 90 days.

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Impact of an EMI default

  • Higher Interest: The bank may charge a higher interest rate on your loan, if you default on your EMI several times, as you may be considered a risky borrower.
  • Impact on Credit Score: The bank will report a default to the credit bureaus which will reduce your credit score and impact your credit history negatively.
  • Other serious repercussions:
    • You may find it tougher to get a loan or you may be charged a higher rate of interest.
    • Today, many companies do a check of potential candidates’ credit history before hiring them. A negative credit report could hamper your chances of landing your dream job.

[Also Read: How to check your Credit Score]

What to do if you have defaulted

  • Defer paying EMI: If you have defaulted on your EMI get in touch with your bank and speak to your loan officer. If it is a genuine reason, say you had a medical emergency in your family and needed to divert funds towards that, the bank may agree and allow you to pay the EMI in the following month. But make sure you pay both months’ EMIs without delay. The bank may charge you a late payment fee.
  • Tenure Extension: If it is a more long-term reason, say you had a pay cut or lost your job, again speak to your bank and try to restructure the loan. Request the bank to the EMI amount by extending the tenure. This will give you some relief and you will be on track to repaying your EMIs from the following month.
  • Interest Payment Flexibility: In some cases, depending on your track record and relationship with the bank, you could request that you be allowed to pay only the interest for a couple of months till your financial stress is resolved. With the condition that your payment will be on track after this. You may be asked to give the fixed time for when you want the relaxation. Remember, this is not common and it is the discretion of the bank to agree to this condition. And ensure you communicate with the bank in writing your intention to repay and restart your EMIs, with the fixed time.
  • Loan against investment/insurance: If you have some asset or financial investment, such as gold, fixed deposit or an insurance policy, you could take a loan against it and repay your loan. A secured loan that is borrowed against collateral has a lower rate of interest and you can repay that later. Use this money to repay the more expensive personal loan or credit card dues. Even if you can’t close your loan entirely, prepay a part of this. This will also reduce your EMI amount and make it more manageable for you.
  • Loan Settlement: If none of these is possible speak to your bank to settle your loan. This means that you agree to repay a part of the loan amount and the bank considers it as a ‘settled’ loan. While the first four measures will keep your credit score intact, settling your loan will have a negative impact on your credit score and history. A loan that is settled is always viewed more negatively than a loan that is repaid in full.

The long-term solution to avoid such situations is to build an emergency fund that will cover three to six months of essential expenses including EMIs. This will ensure that you have funds to repay your loan even when facing any kind of emergency.

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.