While availing a personal loan can be really helpful in situations when you need funds urgently, you must also be aware of the repercussions of non-repayment of EMIs on time. Delayed payments not only hurt your CIBIL score, but you also end up paying a hefty late fee and additional interest on the due amount.
If you fail to pay your loan EMIs on time, you are considered a defaulter. However, most loan providers have what they call a ‘grace period’ which begins right after your EMI due date. If you pay your loan EMI within the grace period, you would not be considered a defaulter. The duration of this grace period is different for different lenders. On the other hand, if you fail to pay your EMI within the grace period, you not only end up paying a late fee, your credit score also takes a toll.
Some of the repercussions of defaulting on your personal loan EMIs are as under:
Impact on Credit Score and Credit Report
Your CIBIL score is an important factor that helps lenders determine your loan eligibility. Details such as the date of repayment, EMI amount, pending amount, etc. are reported by your lender to CIBIL. These details give CIBIL the data it needs to generate your credit score.
If you default on any of your EMI payments, you may notice a minor drop in your CIBIL score. While one missed payment has a minor impact on your CIBIL score, the real problem arises when your credit score falls to an extent that it becomes difficult to get loan approvals in future.
Extra Charges and Late Fees
Late EMI payments also attract many additional charges from your lender. If you make your EMI payment after the due date, there is usually an added “late fee” that you have to bear over and above the EMI amount. If you delay your EMI payment even beyond the grace period, you are labelled as a defaulter and there are added costs on the unpaid amount.
Reduced Future Borrowing Capacity
When you apply for a personal loan, the loan provider carefully assesses your credit report to get an idea of your financial stability and associated risk. In some cases, your score may be so low that you simply do not meet a lender’s eligibility criteria.
When you apply for a loan with a low credit score, your lender is likely to believe that you are negligent about paying EMIs on time. Hence, they will hesitate to approve your loan application. 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 of the reasons behind your late payments and are likely to play it safe and loan you a smaller amount than you requested. Alternatively, they could also charge you much higher in interest.
Loss of Assets Pledged as Collateral
While personal loans are unsecured in nature, in certain cases, lenders do ask you to pledge a collateral. If you avail a personal loan against a collateral and continuously default on your EMI obligations, your lender might seize the collateral.
Potential Legal Implications
If you default on personal loan EMIs, in all likelihood, you won't be put behind bars; however, there may be some kind of legal implications in the form of a civil suit. This rarely happens and a lender usually chooses to take such an action only 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.
Impact on the Guarantor
If someone else signed on your loan application as a guarantor, your negligence towards your EMI obligations may land them in trouble as well. Moreover, their credit score will also be impacted and your lender may even initiate legal action against them.