Personal Loan: What happens if you default on your loan EMI payment?

In today's fast-paced world, personal loans have become essential financial tools for various needs, from home improvements to medical emergencies. However, the ease of obtaining these loans often overshadows the significant consequences of failing to meet monthly payments, commonly known as EMIs (Equated Monthly Instalments). Defaulting on your EMI obligations can severely impact your financial stability and credit rating.

Classifications of loan defaults

1. Major defaults: These occur when a borrower fails to make payments for more than 90 days. Loans classified as Non-Performing Assets (NPA) may deter financial institutions from lending to individuals with significant payment defaults.
2. Minor defaults: These refer to non-payments that last less than 90 days. While they negatively affect your credit score, recovery from minor defaults is often possible.

Effects of missing personal loan EMI payments

1. Credit score impact: Missing an EMI payment can lead to a substantial decrease in your credit score. Most lenders require a CIBIL score of 750 or higher; even one missed payment can lower your score by 50 to 70 points.
2. Creditworthiness: Beyond the credit score, your repayment history plays a crucial role in your credit report. Negative remarks regarding missed payments can lead lenders to view you as a risky borrower, making it challenging to secure future loans.
3. Late fees and penalties: Many banks impose late fees for missed payments, which can add to your financial burden.
4. Recovery agents: If your payments are overdue by more than 90 days, banks may engage recovery agents to collect the owed amount. Typically, borrowers receive a 60-day notice before their account is marked as non-performing.

Strategies to avoid loan defaults

To mitigate the risk of default, consider the following strategies:

1. Plan your finances: Effective budgeting and financial planning can reduce the likelihood of missed payments.
2. Request a lower EMI: If you anticipate difficulties in meeting your EMI obligations, contact your bank. They may offer solutions, such as extending the loan term or converting an unsecured loan to a secured one.
3. Make part payments: Making partial payments can help reduce your EMI burden and interest rates. This proactive approach ensures that you can manage your payments throughout the loan tenure.
4. Request an EMI-free period: In cases of temporary income disruption, approach your lender to request a grace period for EMI payments. Many banks offer a three to six-month reprieve under such circumstances.
5. Communicate with your lender: Open dialogue with your lender about your financial situation can lead to mutually beneficial solutions. Some institutions offer flexible repayment options that may assist you during tough times.
6. Consider refinancing: Refinancing your loan can lower your monthly EMIs, although lenders typically require a good credit score for this option.

Conclusion

Defaulting on personal loan EMIs can have serious repercussions, from damage to your credit score to potential legal action. To avoid these negative outcomes, it’s crucial to understand your loan agreement and make timely payments. 

If you find yourself in financial distress, proactively communicate with your lender to explore options like refinancing or modified repayment plans. Consulting with a certified financial advisor can also provide personalised guidance tailored to your unique situation.

Note: Personal loan interest rates and other provisions keep changing with time. Readers are advised to check the relevant bank's official website for the latest updates.