It is the borrower’s moral and legal responsibility to pay a personal loan amount back to the lender. But as we all know, life gives us surprises and unfortunately, that surprise could be a financial crunch. Such a situation can lead to missing the personal loan EMI. It is essential to know how defaulting on personal loans can affect you and what you can do if you cannot make your loan payment.
What happens when you default on personal loan payment:-
The financial institution will not give you a title of personal loan defaulter if you miss one EMI. If you miss 1-3 EMI, the lender will offer you a grace period; it is a duration which allows a borrower to delay the payment for a shorter period, however, if the payment is not made on or before the due date then late payment fees will be charged. A person is given a title of personal loan defaulter if he/she has missed EMI payment for five or more months.
What happens when you default on payments:-
- When you default on a loan payment, then your credit score will be severely impacted. All the banks and NBFCs will report the late payments to the credit bureaus, reducing the score drastically.
- If you have taken a personal loan co-jointly, then late payment or non-payment will affect co-applicants credit score as well, because if you miss on the payment, then the co-borrower must make the payments.
- Non-payment of EMI will attract late payment fees, more interest rate and increase in processing fees.
- To recover the money, the financial institution can take legal action against you.
What you can do if you cannot make a personal loan payment:-
- Talk to your lender: If you have a genuine reason for missing on payments, you must communicate with your lender. There are chances that the lender will understand your problem. They might increase the tenure and decrease the EMI, increase the due date, or ask for the settlement if you cannot find anyway even after communication. It is worth mentioning that an increase in loan tenure is only possible if tenure does not exceed the retirement age.
- Dig into your savings: There comes a time in everyone’s life where we face a shortage in cash flow, but we might have saved with us. So, if you are unable to make the personal loan payments then you must look into your savings, if there are any savings, then you must use your savings to pay the loan because it is better to use your savings, instead of paying late fees, affecting your credit score, and facing legal action.
- Refinance your loan: Refinancing of loan can be done in many situations like if you feel that EMI is too high and other financial commitments. In such cases banks can refinance your loan, for example, if you are paying Rs 15,000 per month as EMI for a loan tenure three years, then lenders can decrease the EMI to Rs 10,000 per month by increasing the tenure. If you have opted for a floating rate of interest and find that any other lender is providing a personal loan at a lower interest, then you can transfer your loan to another lender. This way, the bank will reduce your EMI.
- Lump-sum settlement: Some of the banks allow the loan settlement facility under which a lender allows a borrower to pay a lump sum amount and settle the loan account. This way, the bank can reduce a few charges like processing fees and other fees. Keep one thing in mind that lump sum settlement will drastically affect your credit score.
What happens if you are still unable to make the payment:
If a borrower is still unable to make the payment, the bank will seize their immovable or movable property within 15-30 days. However, the borrower can buy back the property by paying the loan amount.
Conclusion: If by any chance you have landed in a situation where you are unable to make the payments, then you can try communication with your lender, refinance your loan or make a lump sum payment. However, the best idea is to manage the finances well not to face such issues when you avail the personal loan.
