A home loan default can have a serious impact on your current and future finances. This can affect your credit score and make it harder for you to borrow in the future. Here are the consequences of failing to meet three consecutive home loan EMIs you need to know about.
After the first EMI failure, you will receive a payment reminder via SMS and email from the bank. The reminder may also include a link directing you to make the payment online. The lender may levy a late payment penalty of 1-2% on the outstanding loan amount along with the EMI due. Once you make this payment, your loan account will continue as before.
The second EMI default will result in a reminder from your lender demanding immediate payment of the EMI amount including penalties. Depending on your financial situation, you may have some time to make this payment. However, a second failure will notify the bank, which can take legal action in the event of a third failure of EMI. If you find yourself in such a situation, make the two late EMI payments immediately to recover your loan account.
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If you default on your third consecutive EMI payment, the bank will mark it as a minor default for which you will continue to receive reminders. However, if you miss EMI payments for more than 90 days or three months, the lender will initiate a process of auctioning off your property to collect the fees. Adhil Shetty, CEO of Bank-Bazaar.com, states: “When delaying an EMI, the first action a lender usually takes is to impose a penalty of 1% to 2% per month on the outstanding EMI, which a prescribed minimum quantity. If you commit a major default, the lender marks your loan as an NPA and initiates a collection process. Banks usually send a notice before marking a loan as an NPA.”
Lenders may use third-party agents for loan recovery from NPA accounts. “The NPA can have a cascading effect on the lender-borrower relationship. If the borrower has drawn other loans from the same lender, those loans can also be flagged as NPAs despite timely EMI repayments,” adds Shetty.
How EMI defaults affect your credit score
If you default on three consecutive EMIs and delay paying outstanding fees by more than 90 days, the lender will report it to the credit bureaus as a serious default. This will show up as an NPA on your credit report, severely reducing your credit score and negatively impacting your future credit.
When borrowers face a financial emergency that affects loan repayments, they are often reluctant to communicate with their lenders. However, you should keep in touch with your lender in such a situation. They may be able to offer you alternative repayment options, e.g. a grace period or moratorium, a restructuring of your loan, or a loan redemption.
A sufficient emergency fund is an ideal failsafe in such situations. You can also consider home loan insurance to protect your family in the event of unforeseen circumstances that threaten your ability to repay the loan. Above all, explore all available options and decide based on your circumstances.
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* If you miss EMIs for more than 90 days, the lender will initiate a process of auctioning off your property to collect the fees
* A payment delay of more than 90 days will result in an NPA, severely reducing your credit score