Know the disadvantages of missing your EMI

Digital banking has made it extremely easy to get a loan. While getting money is easy, repayment of the same should be your priority. Delay in repayment of EMI can take a serious toll on your financial health. Here’s what happens when you delay your EMI.

penalty fee
For delaying EMIs by more than a month, the bank may levy a penalty of 1% to 2% on the overdue installment from you, subject to the minimum and maximum amount varying from bank to bank. The penalty fee may vary depending on the type of debt instrument. Banks may also charge penal interest over and above the normal interest for delayed EMI.

NPA classification of your account
Banks divide EMI defaults into two categories: minor default and major default. EMI delays up to 90 days fall under the minor default category, while non-payment of three consecutive EMIs is a major default. In case of minor defaults, banks levy penalty, send reminder notices and report the delay to the credit bureaus. In case of a major default where neither principal nor interest is paid for 90 days, the bank may treat your loan as a non-performing asset (NPA) and initiate recovery proceedings against you. Before your loan is marked as NPA, the bank sends you a notice. If you deposit the requisite amount within the time-limit mentioned in the notice, you can avoid turning your loan into an NPA. Some banks include a third-party recovery agent who can harass the defaulting borrower to repay the loan.

impact on credit score
Depending on the type of loan and other factors, not getting a single EMI can lower your credit score by around 50 points. Adil Shetty, CEO, BankBazaar explains, “Restoring EMIs and taking corrective measures may gradually improve your credit score, but your credit report may still show delayed payments. If your loan is declared as NPA, This can hurt your credit score. NPAs get reflected in your credit report, significantly reducing your ability to take new loans in the future.

settlement of outstanding loan amount
Once your loan is declared NPA, the bank may give you the option to repay the entire outstanding amount including interest and penalty or settle the loan which often waives off the interest and penalty. Debt settlements may seem financially easy, but they can leave a long-term mark on your creditworthiness. If you have ‘debt settlement’ on your credit report, lenders will not be inclined to give you new loans. So, if your loan is classified as NPA or it is on the verge of becoming NPA, try to get time extension or loan restructuring from the lender.

How to avoid delay in EMI payment
It is always better to plan your loan repayment plan to avoid hassle at a later stage. Instead of letting your debt become an NPA, explore options like liquidating some of your low-return investments. Having a strong emergency fund can come in handy to overcome such financial difficulties.

Sometimes the lender may give you some relaxation such as extension in repayment period, loan restructuring, etc. Avoid taking too many loans at the same time.
Also, avoid taking a loan to repay another loan as it can lead to a debt trap and you may find it difficult to recover from it. If you find it difficult to repay the EMI, you can service the minimum interest to avoid your loan being classified as NPA.

loan default
For delaying EMI by more than a month, the bank may levy a penalty of 1-2% on the overdue installment from you
Depending on the type of loan and other factors, not getting a single EMI can lower your credit score by around 50 points
If you cannot pay the EMI, pay the interest to prevent the loan from turning into NPA
Try liquidating some of your investments to pay off the outstanding loan amount