What Will Happen If A Personal Loan EMI Bounces?

What do Personal Loan EMI bounces mean?

• Major defaults

  It is a scenario in which your most recent EMI payment was 90 days ago. The lender classifies the funds outstanding on your side as a non-performing asset (NPA). The lender further categorises such lending as loss assets, doubtful, and substandard based on the likelihood of recovery. 

• Minor defaults

  This applies when the EMI non-payment period is less than 90 days. Minor defaults have no long-term consequences if efforts are made to overcome them at the appropriate time.

What happens if the personal loan EMI is bounced?

1. Impacts credit score

   Defaulting on more than three consecutive EMIs has a long-term impact on your credit score. The skip is recorded on the report and stays there for several years. As a result, your future borrowing will be severely impacted. Furthermore, if you have a home or used car loan and want to transfer the balance to lower your interest rate, the new lender will not accept your application.

2. Raises the amount payable

   Each missed EMI incurs a penalty, which can range between 2-3% of the missed amount. This penalty is assessed on a monthly basis. If you continue missing your EMIs on a regular basis, the interest penalty will significantly increase the total amount payable at the end of the loan term.

3. Loss of Asset

   Personal loan are not collateralized, but in some cases, where the applicant fails to meet the minimum qualifying condition, the lender approves the loan after the borrower put in some valuables as collateral. These valuables can include anything from investment documents to vehicle papers to jewellery. If the preceding example applies to you and your EMIs are regularly bounced, the lender may seize your asset to recoup their losses.
    

4. Higher Interest Rate

   The interest rate on your borrowing is primarily determined by your credit report, which has already been deteriorated by your regular EMI skips. Even if you have a good income and a lower debt-to-income ratio in this situation, you will be denied a loan in the future, and if approved, your interest rate will be higher.

5. Legal Action

   Since this loan product is not secured, the lender's last resort for recovery is to take the defaulter to court. In such a case, depending on the outstanding amount and other factors, you may be forced to declare yourself bankrupt. And bankruptcy means not only restrictions on future borrowings but also difficulty in obtaining insurance claim approvals (if the situation arises in the future), difficulty in starting a business in your name, and difficulty in finding a property to rent.

Also Read: Personal Loan or Credit Card Which one would you go for
 

How can I avoid an EMI default?

• Plan your budget

  Always have a full-fledged repayment plan before you apply for funding. Cut down your extravagant spending, limit your dining at expensive restaurants, and reduce your travel frequency. Use a personal loan EMI calculator to determine how much money you must set aside each month for repayment.

• Investment

  You can invest in schemes where the returns either exceed your loan interest rate. Also, ensure that the investment returns are paid out monthly or quarterly. This makes repayment simpler. Corporate bonds, mutual funds, and stock SIPs are some investment options you may consider.

• Automate payments

  Make sure to automate your repayment. This ensures that as soon as your salary is credited, the first thing that is debited is your loan EMI.

• Communicate with the lender

  If you are having difficulty managing your finances, you should discuss this with your lender. If you explain your situation clearly to the lender, they may be willing to reschedule the loan terms by extending the repayment period.

• Balance transfer

  It entails transferring the outstanding personal loan balance to the new lender. Make sure you apply for a balance transfer before the EMI skip situation arises. The interest burden is reduced by transferring the outstanding balance, making repayment easier.

Also Read: 5 Brilliant Ways to Avail a Personal Loan with a Low Credit Score

Long-term Effects on Borrower's Credit Score

The credit score is a numerical representation of your creditworthiness. A bounced EMI indicates financial instability and can lead to a decrease in your credit score. A lower credit score makes it challenging to obtain loans or credit cards in the future and may result in higher interest rates if you do qualify.

1. Impacts Credit Score
Defaulting on more than three consecutive EMIs has a severe and lasting impact on your credit score. Each missed payment is recorded on your credit report and remains there for several years. This record significantly affects your future borrowing potential. 

2. Raises the Amount Payable
Every missed EMI incurs a penalty, typically ranging between 2-3% of the missed amount, and this penalty is assessed monthly. Over time, these penalties can accumulate, significantly increasing the total amount payable by the end of the loan term.

3. Loss of Asset
While personal loans are generally unsecured, there are instances where lenders require collateral, such as investment documents, vehicle papers, or jewelry, if the borrower does not meet the minimum qualifying conditions.

4. Higher Interest Rate
Your credit score is a crucial determinant of the interest rates offered to you on future loans. Regular EMI skips degrade your credit report, which means that even if you have a good income and a lower debt-to-income ratio, you might still be denied future loans or be offered loans at much higher interest rates.

Conclusion

Missing your monthly payments results in EMI bounce charges and a lower credit score. If you have missed only one EMI payment, you can always avoid the negative consequences by increasing your EMI payment for the next few months or foreclosing on your loan.
 

Frequently Asked Questions

How Does An Emi Bounce Affect My Credit Score?

Missing more than three consecutive EMIs can significantly lower your credit score. This record stays on your credit report for several years, affecting your future borrowing capability.

What Are The Financial Consequences Of Missing Emis?

Each missed EMI incurs a penalty, typically 2-3% of the missed amount. Continued misses can accumulate significant penalties, increasing the total payable amount.

How Does Missing Emis Affect Future Borrowing?

Regular EMI skips deteriorate your credit report, leading to higher interest rates on future loans or even loan application rejections.

Can Legal Action Be Taken Against Me For Missing Emis?

In extreme cases, lenders may take legal action to recover the outstanding amount. This can lead to severe financial repercussions, including declaring bankruptcy.