What Happens if you Miss your Home Loan EMI?
Purchasing your first home puts you in a financial bind and uses up all of your savings. You also strive to get the largest feasible house loan so that you can buy the greatest property possible with the money you have. Home loans are long-term obligations that require EMI payments for at least 15-20 years. Your financial responsibilities alter considerably throughout these years, and you may find yourself unable to make your home loan EMI payments. Although most lenders would be flexible if they were notified of a single default in advance, repeated failures can have far-reaching consequences. If you miss an EMI, you may be required to pay the missed amount in addition to the next month’s EMI the following month.
However, if you miss one or two EMI payments due to unforeseen circumstances, it’s not a significant issue. In this case, the bank will give a quick warning. If you don’t pay your EMI for three months in a row, it will be considered a red flag. The bank will identify you as defaulters, and you will receive a notification. If you have a strong payment history and legitimate reasons, the lender may allow you a grace period. The default, on the other hand, will lower your credit score.
Consequences of Missing Home Loan EMI
Some of the consequences of missing your Home Loan EMI are as follows:
- Late Fee is Imposed
In the event of a default on a home loan, you will be charged late fees, fines, and, in some cases, penal interest. The penal interest is usually 1-2 percent of the EMI. As a result, you may be compelled to pay penal interest on the entire amount owed for the time of default, depending on the circumstances. This is in addition to any late fees levied by the lender.
- Collateral Possession
After three consecutive EMI defaults, banks and financial institutions frequently consider a loan default to be a Non-Performing Asset (NPA). As a result, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) of 2002, they began the process of recovering debts. You are granted 60 days to clear your debts after obtaining a legal notice. Under the SARFAESI Act, banks have the power to seize your collateral if you don’t pay your debts within 60 days. Your collateral can be seized without a court order under the SARFAESI Act.
- Auction of Collateral
The bank will give you another notice with the value of the collateral, if it’s a property or jewellery, and the date of the auction if the dues aren’t cleared after 60 days. If the collateral is a life insurance policy, the funds are returned to the lender before the policy is ceded to the insurer.
- CIBIL Score takes a hit
Even skipping a single EMI payment can affect your credit score because it will appear on your credit report. A single loan default can reduce your credit score by 50 to 70 points. This has an impact on both your credit score and your creditworthiness for future borrowing plans. You’re considered a high-risk borrower by banks, which lowers your chances of securing a loan. Even if you are authorised for a loan, there are severe terms and conditions that must be followed. However, there are certain measures that you can adopt on how to improve CIBIL score.
You could ask your lender for a reduced EMI and more efficient financing to prevent defaulting on your house loan. If you have a gap in your funds, you can approach the lender and ask for an EMI-free time. Banks may issue you a three- to six-month EMI payment waiver if you have lost your employment or temporarily halted your business operations. On the other hand, the lender has the option of charging interest on the outstanding loan amount at a later date. Another alternative is to make partial payments to lessen the EMI load. This can be accomplished with the assistance of a house loan overdraft. When you have extra cash and an active house loan, making a partial payment to your overdraft account may relieve your financial burden.