How missing EMI impacts your credit score?

Taking a loan is easy. But repaying the loan on time is equally difficult. It’s possible to miss out on EMIs due to various reasons like losing a job, medical emergencies, etc. What happens if you miss out on EMI payments?

Missing the EMI payment of a loan can be classified as either major or minor default. If one or two installments are missed, meaning the second installment is paid within 90 days of the last payment, it is considered a minor default. But if no EMI is paid for more than 90 days, meaning for more than three months, it is considered as a major default. The real trouble starts here, because banks classify such loans as NPAs, Non-Performing Assets.

When you miss the first EMI, the bank sends you reminders via phone calls, messages, or emails to repay the installment. Delay in paying the EMI results in a penalty, which is usually 1 to 2 percent of the EMI amount.
Additionally, punitive interest can also be imposed, which is charged on the top of the loan interest rate. Once this payment is made, the loan account will continue to function as before. But if you don’t pay the EMI for a long time, the penalties will keep increasing.

The information about EMI default is recorded in your credit report, and it affects your credit score. Missing one EMI can decrease your credit score by 50-70 points. Consistent delays or repeated EMI defaults can significantly damage your credit score, which in turn, harms your creditworthiness, and your ability to borrow money.

A reduction in the credit score reduces the chances of getting loans in the future. Banks may refuse to lend to you if your credit score is poor. And even if a small bank or finance company agrees to lend to you, they often impose higher than usual interest rates.

If you don’t pay the installment on time, you may have to deal with recovery agents. These recovery agents threaten to come to your office and home to collect the loan amount. They will pester you with hundreds of calls in a day There have been many complaints of misbehavior by recovery agents towards customers. However, in such cases, you can file a complaint with the police.

If the default on a personal loan exceeds 90 days, banks can take legal action to recover the amount owed, and you may end up facing a lawsuit. The court may order you to repay the loan, or order the seizure and sale of property to recover the amount owed.

We have talked about unsecured loans like personal loan, credit card. Now lets see what happens in case of  secured loans.

Secured loans are those loans, for which any asset collateral i.e. property is required to be mortgaged like home loan, car loan, loan against property, etc. When taking a home loan, the documents of the house remain mortgaged with the bank. After repaying the loan, the bank hands over the documents back to you.

If home loan EMI is not paid for more than three consecutive months i.e. 90 days, banks declare the loan as NPA. After being declared NPA, a notice will be issued to you under SARFAESI Act. The borrower has to repay the outstanding amount within 60 days from the date of notice. If you do not pay the money even after this period, the bank can auction your property and recover the money and you may have to lose the property.

Only take the amount you can comfortably repay as a loan. In case of any financial problems, contact the bank, and discuss loan restructuring, increasing the loan tenure, reducing EMI, or asking for a grace period so that you don’t default on the loan. You can alleviate the burden of the loan by directing your savings towards it or borrowing money from friends and acquaintances. And yes, make sure to create an emergency fund. Keep an amount equivalent to 6 to 12 months’ salary in it so that you can use it in difficult times.