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Defaulted on your EMIs? Here is what you should do now
What if you have taken a loan from a bank and have missed paying the EMI? If for some reason the funds in your account are insufficient, then your EMI does not get debited on the due date. You will receive a reminder from your bank, via phone call or email, asking you to pay the dues. In many cases the bank allows a few days grace period during which you can pay the instalment. Following this grace period, the bank may charge you a late payment fee. It will be considered a default if you miss the EMI by three months or 90 days.
Impact of an EMI default
- Higher Interest: The bank may charge a higher interest rate on your loan, if you default on your EMI several times, as you may be considered a risky borrower.
- Impact on Credit Score: The bank will report a default to the credit bureaus which will reduce your credit score and impact your credit history negatively.
- Other serious repercussions:
- You may find it tougher to get a loan or you may be charged a higher rate of interest.
- Today, many companies do a check of potential candidates’ credit history before hiring them. A negative credit report could hamper your chances of landing your dream job.
- You may find it tougher to get a loan or you may be charged a higher rate of interest.
- Today, many companies do a check of potential candidates’ credit history before hiring them. A negative credit report could hamper your chances of landing your dream job.
[Also Read: How to check your Credit Score]
Here are some strategies to consider if you have missed an EMI payment:
- Postponing EMI payment: Contact your bank and discuss your situation with your loan manager. For instance, if a medical emergency caused a temporary financial crunch, the bank might allow you to delay your EMI payment to the next month. Ensure that you pay the EMIs of both months promptly. Be aware that the bank might impose a penalty for the delayed payment.
- Extending the loan period: In case of long-term financial issues like a salary reduction or job loss, it's advisable to negotiate with your bank for a loan modification. You can ask for a reduction in the EMI amount by extending the loan's duration. This can provide some breathing room and help you resume regular EMI payments from the next month.
- Negotiating interest-only payments: If you have a good history and relationship with the bank, you might negotiate to pay only the interest for a few months until your financial situation stabilises. This arrangement should come with a commitment to resume full EMI payments after the specified period. This option is not commonly available and depends on the bank's discretion. Make sure to document this agreement in writing, including your plan to resume full payments.
- Securing a loan against assets: If you own assets or investments like gold, a fixed deposit, or an insurance policy, consider taking a loan against these as collateral. These secured loans usually have lower interest rates. You can use the borrowed funds to pay off higher-interest loans like Personal Loans or Credit Card debts. Partial repayment of your existing loan can also reduce your EMI, making it more manageable.
- Negotiating a loan settlement: If the above options aren't feasible, discuss settling your loan with the bank. This involves agreeing to pay off a portion of the loan, with the bank considering the remaining amount as 'settled'. While this can alleviate your immediate financial burden, be aware that it will negatively impact your credit score and history, as settled loans are viewed less favourably than those paid in full.
The long-term solution to avoid such situations is to build an emergency fund that will cover three to six months of essential expenses including EMIs. This will ensure that you have funds to repay your loan even when facing any kind of emergency.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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