Getting a loan is very common these days. Be it a home loan, car loan, personal loan, or any other, obtaining funds from banks and paying them back on EMIs is a popular financing option. They are a convenient way of getting credit and fulfilling transactions for big purchases or even emergencies. 

However, after borrowing a loan, the actual responsibility starts on your part as you have to repay it through Equated Monthly Instalments (EMIs). These amounts are automatically deducted from your connected bank account on a monthly basis. 

But, what happens if EMI is not paid on time? Defaulting on EMIs is a common problem that you can face when you don’t have sufficient funds in your account. 

Let’s understand the consequences of such a situation and how you can avoid it. 

What Happens if EMI is Not Paid on Time? 

You might face multiple issues when an EMI is not paid on time against your loan. Below are the major ones: 

1. Negative Impact on Credit Score 

When you borrow loans, timely payments of EMIs are absolutely essential to maintain your credit score and eventually build it. Most lending agencies and banks need a credit score of at least 750 to approve a loan application. Missing just one EMI payment can lower a borrower's credit score by 50 to 70 points. 

2. Late Payment Penalties 

This is the most common consequence that you have to face when you miss an EMI payment. Banks will charge you a late payment fee, which can be around 1 or 2% of the EMI amount. 

3. Increase in Interest Rate 

When you miss a loan payment, interest keeps adding to the unpaid balance. This raises the total interest you pay over the entire loan period. Consequently, you end up repaying a larger amount than you initially took out. 

4. Recovery Measures 

Banks and financial institutions may send agents to collect unpaid loans after 90 days. Before a loan becomes a bad debt, the bank warns the borrower 60 days in advance. This situation can be very stressful; it's best to prevent it from happening. 

5. Seize of Property or Collateral  

The bank can seize your property if you used it as collateral and consistently fail to make loan payments. 

6. Legal Action 

Lenders usually try to work things out by talking and sending reminders. But if you don't pay on time too often, they might sue you to get their money back. Failure to pay could result in the court taking your possessions. 

7. Getting Blacklisted 

Credit bureaus can eventually blacklist you if you fail to pay multiple EMIs on loans. This will make it nearly impossible to get loans or apply for credit cards in the future. 

8. Impact on Creditworthiness 

A credit report shows your payment history, not just your score. Even with a good credit score, past missed payments can cause loan rejection. Lenders often see these comments and think you might not repay the loan on time. 

Types of Missed EMIs 

1. Major Defaults 

Major defaults have big penalties. If you miss an online personal loan payment and haven't paid late in the past 90 days, it's a major default. This goes on your credit report and can hurt your chances of getting a loan or credit card later. Many lenders will mark your loan as a bad debt if you have a major default. 

2. Minor Defaults 

Minor defaults have small consequences you can fix. A missed loan payment is a minor default if you pay it back within 90 days. You can recover from this by fixing things quickly. 

Disclaimer: All the information and penalties specified above are sourced when this page was written and is subject to change.  

How to Avoid Missing EMI Payments 

You should always avoid missing loan payments. But if you think you might miss one, here are some options. People usually know ahead of time if they can make a payment. 

Plan better: Manage your money wisely to prevent missing payments. 

Ask for a lower payment: If you think you'll miss a payment, tell the bank you're having trouble and ask for a smaller payment. Banks can make payments smaller by letting you pay the loan back over a longer time or by asking for something valuable to secure the loan. Lower payments are usually bigger when you use something as security. Not many banks let you take longer to pay back the loan. 

Make extra payments: Pay extra money when you have it to lower your regular payment and interest. This helps make sure you can keep up with payments. 

Ask to skip a payment: Consider asking your bank for a 3 to 6 month payment deferral if you lose your job or business. After that, you'll need to make payments again. 

Take the help of friends or family: Ask friends or family for a loan without interest to help pay your loan. Pay them back when your money situation improves. 

To Sum Up, 

The consequences of missing a loan payment can be severe. It can hurt your credit score, lead to hefty fees, and even legal trouble. By planning your finances, communicating with your lender early, and exploring solutions like lower payments or skipping a payment, you can avoid missing EMIs altogether.  

Remember, a healthy credit score and responsible borrowing habits open doors to better financial opportunities in the future. Prioritize your loan repayments to build a strong financial future. 

Frequently Asked Questions 

1. What happens if EMI is not paid on time? 

If EMI is not paid on time, you can incur late payment charges, higher interest rates, reduction in credit score, legal actions, seizure of property, etc. 

2. What is the average late payment charge for missed EMIs on loans?  

One missed EMI can cost you about 1-2% of your outstanding loan amount as later payment charges.  

3. When is a late payment considered a default?  

Any EMI payments, missed for 90 days or more are considered a default.  

4. Do missed EMI payments affect my credit score?  

Yes, missing an EMI payment is recorded against your repayment history and affects your credit score.  

5. How many credit score points will be reduced for a single missed payment?  

A single missed EMI can result in a drop of 50-70 points from your credit score.  

6. How long will a payment default stay on my credit report?  

Payment defaults stay on your credit report for 7 years, after which they are dropped from your report. 

7. Can I request my bank to stop charging my EMIs for some time?  

If you are facing any financial constraints, you can ask your bank for an ‘EMI Moratorium’, where EMIs will not be deducted from your account but the interest will keep accumulating. This amount will be adjusted as a higher EMI amount or longer EMI tenures. 

Disclaimer: This page includes information that has been compiled from many sources and is only offered for informational purposes. Since this type of data might change over time, we cannot guarantee that the information supplied or included within it is accurate. It is anticipated that the user would confirm with the relevant source prior to taking any choices or actions.