So, you missed an EMI! For many of us, there are times when things don’t go well with the plan. While missing an EMI is quite common but nobody wants to end up as a defaulter.
Who is Defaulter?
Failing to pay multiple due EMIs (Equated monthly installments) in a timely manner and the inability to pay future EMIs during the grace period can incur the title of a Defaulter.
While some lenders offer flexible policy plans for this case most don’t and take action. So once your payment day passes you can expect to receive a call or mail from your lender as a reminder. If this is the first time you have missed an EMI you might be able to pay no fine. However, if a period of 120 days has passed since the default notice, the creditor will send a letter of demand claiming the full amount in payment.
Loan Default is categorized into two types:
Non-payment of the loan EMI for more than 90 days is considered a major default. This can hamper your future ability to take loans and also affect your overall financial health.
Non-payment of a loan EMI for less than 90 days is referred to as Minor Default.
How the nature of your loan affects default?
Your loan can be classified into a secured loan, and an unsecured loan.
In case of a secure loan like home loan, loan against property, and car loan. If there is a repeated case of default, the Legal rights of the property or the car is handed over to the lender. In case, where assets like gold, share, or other investments are pledged, the lender has the right to sell them off to recover their losses. However, before such actions, they will send you a final notice to pay the loan in a specified time.
If you don’t pledge any asset or there is no guarantor involved then the loan is unsecured. Defaulting, in this case, can lead to the following possibilities:
- An increased interest rate: The lender has the right to add additional fines and charges on your due payment.
- Low CIBIL score: An EMI default can lower your CIBIL score and reduce your future ability to take a loan.
- Collection Agencies: Some lenders turn to collection agencies to recover their money. These agencies can contact you via call, email, or even home visits.
- A lawsuit: Some lenders who don’t recover their money may sue defaulting borrowers. This can make the borrower pay the outstanding amount along with the legal fees and charges.
What to do?
If you have defaulted on a loan or are expecting to default for whatever reason. You need to calm down and plan your actions to come out of this situation. Following steps are advisable in such a situation:
- Figure out your expenditure and understand how you are unable to make the payment.
- Communicate with the lender: Explain the reason for your loan default and work out a solution that benefits both of you. Some lenders have a flexible policy and they may figure out a solution for you to maintain your EMIs.
- Refinancing: Many financial institutions offer refinancing for your ongoing loan. When a new financer pays your outstanding loan to your old lender and opens a new loan for you at a new interest rate and duration of the loan, this is called refinancing. It gives you the ability to lower your EMI amount. However, most financial institutions expect you to have a good CIBIL score for refinancing.
For more such updates, keep watching this space!