As a new loan borrower, one of the crucial questions which generally may come to your mind before availing of a personal loan is, what would happen if you do not pay your EMIs on time? While it may come across as insignificant and redundant initially, this question must be answered because without being aware of the ramification of defaulting on financial obligations, many undoubtedly put themselves at the major risk of facing a debt trap. May it be a 1 lakh loan or a 2 lakh loan, you must be aware of your repayment capacity using a calculator and opt for the EMI amount you are capable of repaying.
Negative impact on the credit score –
One of the most serious ramifications that you may experience on late payment or non-payment of your urgent EMI will be the negative impact that it would create on your credit score. As explained previously, Indian credit rating agencies like Experian and CIBIL factor in 4 major parameters to compute your credit score. The most important of them are –
∙ Number of timely repayments you conducted
∙ Number of late repayments you conducted
∙ Number of loans you have availed previously
∙ Overall credit amount you have used
As you can view from the list, the timeliness of your repayment is a major concern to both the credit rating agency and your lender. Thus, if you are unable to pay one of your EMI timely, you can instantly expect to face a negative impact on your score in the upcoming months.
A good point to remember is that during the initial couple of non-repayments, the reduction in the score will be extremely moderate. However, as the non-repayment duration continues, the effect may trickle from critical to worse.
Late payment fees and additional charges –
Next to depreciation in your credit score in your report, the next consequence of non-repaying your loan will be reflected in the added amount that your lender may charge you in the coming months. Regardless of the lender you select for your personal loan, one common ramification that all of them must adhere to is charging a late payment fee for the delayed payment along with additional fees to recoup from losses.
Alongside this, in a few cases, the lender may follow a fail-safe policy where higher interest constituent automatically begins getting charged on your due component once you miss out on your payment by the due date.
You may not just face a negative impact on your score, and you can expect extreme additional charges imposed upon you in the case of late payment or non-repayment of your personal loan EMI.
Reduced credibility –
One of the common aspects of new borrowers is often that they are not aware of the fact that all your repayment and lending history are carefully captured, analyzed, and stored for future accessibility by credit reporting agencies. It means that no matter whichever lender you approach for a loan, it will be reported to your credit rating company along with your past repayment record, and the Indian credit bureau will continuously review this data to accurately compute your updated credit score.
As pointed out previously, once your score begins dipping owing to late repayment, you enter a downward spiral, which will directly impact your borrowing potential in the future. In case you do not pay for your current dues timely, the next time that you approach a lender for any loan type, may it be a vehicle loan or home loan, they will get wary of lending or just extend their offer by levying a premium rate of interest.
Loss of assets –
In India, there are essentially 2 kinds of personal loans. One is an unsecured loan, and the next is a secured loan. Now, as you know about the unsecured loan, you may be wondering what’s a secured loan. Essentially, a secured loan is a financial lending instrument where you must pledge specific collateral or asset to the lender. To this, the lender grants you a loan against this security.
In the case that you have availed secured personal loan and you have failed regularly to mitigate the repayment obligations, one consequence you may face is the loss of assets you previously used as security. As you pledged your crucial assets as collateral or security to the lender, on non-repayment of EMIs, the lender will seize your collateral or security and either lease them or sell them to a 3rd party for recovery of all their losses. While the occurrence of it may be rare, the possibility of this happening cannot be avoided.
Legal implications –
Lastly, when all your hopes are lost, the lender may file a civil lawsuit against you. In many cases, it usually is the last resort that lenders opt for after all the above options are tried. While you will not necessarily be put in jail, a civil lawsuit will instantly become an extremely costly process for you. Beginning from legal charges of your lawyer to actual monetary compensation that you are deemed to provide to the lender, this process undoubtedly is exhausting, tiring and mentally straining.
Ending note –
When you are availing of a personal loan of any amount, may it be a 1 lakh loan, 2 lakh loan, 10 lakh loan or 30 lakh loan, the initial thing that you must concentrate on is planning your repayment. While it may sound obvious initially, without proper planning, you may put yourself at extreme risk of adverse consequences, as pointed out above. So, ensure to plan, make sure to repay your loan EMIs on time and stay safe. Use a personal loan EMI calculator to understand your repayment capacity. On the loan EMI calculator, you must input your required loan amount, expected interest rate, and preferable repayment tenure. Ensure to keep changing the inputted figures on the online EMI calculator to derive the result that matches your repayment potential. Once you know the figures that best fit your repayment capacity, move ahead with your personal loan application.