Default on Your Personal Loan EMI Payment

What Happens if you Default on Your Personal Loan EMI Payment?

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03 Sept 2020
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Personal loans are the perfect option for those emergency situations when one is in dire need of finances. They are easily available, both offline and online, as unsecured forms and debt without too much restrictiveness on the loan amount. Paying back your loans on time is essential. If you do not make your payments on the scheduled dates, you are considered as a loan ‘defaulter.’ When it comes to the non-payment of a personal loan each lender has its unique set of terms and conditions. Defaulting on your personal loans’s scheduled payment may have certain repercussions.

What does it mean to default on your personal loan?

If you fail to pay your loan EMIs on time, you are considered a defaulter. However, keep in mind that certain loan providers have what they call a ‘grace period’ which begins right after your EMI due date. If you happen to make your loan payment during the grace period, you may be required to pay a ‘late payment’ fee to avoid the title of a ‘defaulter.’ Different lenders have differing lengths of this grace period, as well as different fees. Note that if you miss just a single payment, you will not get the title of a defaulter. Missing one payment may not make you a defaulter. However, your lender is likely to report you as a defaulter when you miss at least a couple of EMIs.

In general, most borrowers may default their payments in one of two ways. First, there is the ‘genuine defaulter’ who is somebody that misses out on making the occasional payment but more or less covers their EMIs on time. The reason behind occasionally paying late may be a medical emergency, job loss, or other unforeseen circumstances. By explaining these reasons to their loan provider, this individual will probably be granted a grace period. The second way in which a borrower may default payments is just by having an irresponsible attitude towards loan repayments. In the latter case, one forgets as a result of negligence, and not because of genuine financial concern.

What Happens if you Default on Your Personal Loan EMI Payment?

Here are some of the outcomes when you default on paying your personal loan EMIs.

  • Credit score and credit report

Your credit score is one of the factors that determines your personal loan eligibility. Date of payment, amount of EMIs, and more are included which gives CIBIL the data it needs to generate your credit score. Any financial transaction related to debt repayments are recorded in your credit report. Overdue payments as well as non-payments are reported by your lender to CIBIL. By defaulting on your EMI payments, you may notice a minor or major drop in your CREDIT score. Even one missed payment leads to a small drop. The problem arises when one's CREDIT score is so low that it affects their personal loan eligibility. Hence, it becomes difficult for them to obtain loans down the line. Hence, it is important to pay your loan amount in time. These factors harm your credit score and affect your chances of being accepted the next time you apply for a personal loan.

  • Extra charges and Late fees

If you pay your EMI late, you may attract additional charges from your lender. If you make a payment towards your EMI which is after your due date but within your lender’s grace period, there is usually an added ‘late fee’ that you will have to pay alongside your EMI amount. If you delay further, and the grace period is crossed, you will be charged by your lender as a defaulter and there will be added costs on the unpaid amount.

  • Reduced future borrowing capacity

The next time you apply for a personal loan, the loan provider carefully assesses your credit report and score to get an idea about your financial stability as well as the risk involved in providing a loan to you. In some cases, your score may be so low that you simply do not meet the requisite personal loan eligibility criteria. When you apply for a loan with a low credit score, your lender is likely to believe that you are negligent with respect to paying EMIs on time. Hence, the lender will hesitate to loan you money. Even if an exception has been made for your late payments by your previous loan provider, it is difficult to make these details clear to your new lender. They may not be aware about the reasons behind your late payments and are likely to play it safe and loan you a smaller amount than you requested.

  • Loss of assets as collateral

When you apply for a personal loan, almost always there is no collateral asked of you as you are choosing an ‘unsecured’ loan. However, while personal loans are unsecured, in certain cases, the lender may request that you offer some security of yours as collateral. Loan providers can sometimes request the name of a ‘guarantor’ whose contact serves as a kind of collateral. Defaulting on your EMIs will most likely land your guarantor in some kind of trouble as well. When you default on any ‘secured’ loan, you lose the security that you have pledged against it.

  • Potential Legal implications

When you default on a personal loan, you won't necessarily be put behind bars but there may be some kind of legal implications in the form of a civil suit. This is a rare occurrence and is particularly chosen by the lender when there have been multiple attempts to retrieve the loan amount from the borrower. Hence, it is a lender’s last resort and ends up being an incredible financial burden for the borrower.

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