Securing a personal loan has become incredibly convenient in the current financial landscape. Lenders expedite loan disbursement, often within a day for pre-approved loans and between two to seven days for regular applications. The charm of these unsecured loans, especially in times of financial strain or unexpected expenses, is undeniable due to their swift availability. However, the ease of obtaining a personal loan often leads individuals to overlook the significant financial implications associated with such borrowing.
While the application process may be straightforward, the real challenge lies in timely and complete repayment. Life’s uncertainties, such as illness, accidents, job loss, unexpected expenditures, or family issues, can significantly impact one’s ability to meet personal loan EMIs. It’s essential to recognise these potential challenges and thoroughly assess the long-term financial commitments before opting for a personal loan.
Categories for the Defaulters
A missed personal loan EMI is categorised into two primary types, namely major defaults, and minor defaults.
Major defaults, as the name implies, incur substantial penalties. If you fail to settle your outstanding dues within the preceding 90 days, it is considered a significant default. Notably, this default information is recorded in your credit report, potentially affecting your eligibility for future loans or credit cards. Furthermore, some lenders might designate your loan account application as a non-performing asset (NPA) in the presence of a significant default record on your credit profile.
On the other hand, minor defaults entail less severe consequences that are correctable. If you rectify the missed payment within 90 days, it is classified as a minor default. Facing a minor default scenario allows you the opportunity to mitigate negative consequences by taking prompt corrective measures.
Consequences of Missing Timely Payments on Personal Loan
Now, let’s understand the repercussions of missing an EMI payment.
Negative Impact on Credit Score: The well-known consequence of an overdue EMI payment is the adverse effect on your credit score. Whether categorised as a minor or significant default, the late payment is recorded on your credit profile, causing a substantial drop in your credit score. A high credit score is imperative when applying for a new loan, as it influences approval decisions and the interest rates offered. Missing even a single EMI payment can result in a credit score reduction ranging from 50 to 70 points.
Inclusion in Credit Report: Beyond affecting your credit score, a missed EMI payment leaves a detrimental mark on your credit report. Lenders scrutinise this report to assess your creditworthiness, and the presence of a black mark can deter them from approving your loan application. Even if approval is granted, the consequence may be higher interest rates due to the perceived risk.
Late Fee Penalties: The aftermath of missing an EMI extends to financial penalties imposed by lenders. Late fees, typically ranging from 1% to 2% of the EMI, are commonly charged. To rectify the missed payment, you are obligated to settle not only the overdue EMI but also the imposed penalty and the subsequent month’s EMI in the upcoming payment cycle. These penalties add an extra financial burden and underscore the importance of timely payments to avoid additional costs and safeguard your credit standing.
Tips for Timely EMI Payments
Set up Automatic Payments: Automate your EMI payments by setting up standing instructions or automatic debits from your bank account. This ensures timely payments and reduces the risk of oversights.
Create Reminders: Utilise calendar alerts, mobile apps, or reminders to notify you about upcoming EMI due dates. This proactive approach helps you stay organised and avoid missing payments.
Maintain Sufficient Funds: Ensure that your bank account has sufficient funds to cover the EMI amount on the scheduled date. Overdrafts or insufficient funds can lead to missed payments and additional penalties.
Opt for ECS/NACH Mandate: Enrol in Electronic Clearing Service (ECS) or National Automated Clearing House (NACH) mandates with your bank. This allows automatic deduction of EMIs from your account, minimising the chance of oversight.
Create a Financial Calendar: Develop a comprehensive financial calendar outlining all your payment obligations, including EMIs. This visual aid provides a holistic view of your financial commitments and helps you plan accordingly to avoid missed payments.
Financial Disciplines for Loans
The consequences of missing timely payments on a personal loan are far-reaching, impacting credit scores and credit reports and incurring additional late fees. Maintaining financial discipline and adhering to payment schedules is crucial for safeguarding your creditworthiness and overall financial health.
When taking personal loans, consider a reliable financial partner like Tata Capital. With a commitment to tailored solutions and customer-centric services, they ensure a secure and supportive journey towards your financial goals.
