Missed an EMI? What Can Happen Now and What Should You Do? Let’s Find Out!

Car Loan Documents Required

The Covid-19 pandemic has had its impact not just on the health and lives of humans around the world, but also on the global economy. The viral outbreak has led to losses in all business sectors, uncountable termination from jobs, and a reduction in salaries. We all know how difficult it is even during normal times to juggle your budget with your monthly expenses, surprise expenses that invariably disturbs the balance of our cheque books. It is only much more difficult during a health crisis that you cannot escape from.

Governments are trying to help us with subsidies and other measures but with a population like India’s, it is not surprising to hear that there are many of us who still struggle financially. This article is for all of you who are in a tough spot financially and missed an EMI or going to miss one in the near future.

Whether or not you are going to miss an EMI or not, it is important to know the consequences of lapses in payment. Before letting your debt spin out of your control, let’s get to know what can happen when you have missed an EMI for your car loan.

Car Loan EMI

People choosing to finance their car dreams with auto loans have been increasing steadily. Auto loans require minimum documentation and effort from our end as they are approved pretty quickly. These auto loans have a tenure period that is usually between 1 to 5 years and comes with the Equated Monthly Instalment payment schedule that eases the debt settlement for the customers.

However, even with the choice of tenure period and EMI options, it so happens that a borrower might face difficulty in repayment during complicated situations like the one we all are in currently. There are some negative aspects to missing EMIs even though it might not look like a big deal to miss one or two EMIs.

What happens if I miss an EMI payment on your auto loan?

EMI or Equated Monthly Instalments is an easy and preferred payment method to clear an outstanding loan within the tenure period. In case you are short of funds to pay an EMI during a certain month, your EMI will not be debited from your account on the due date. This will generate a reminder email or call from your bank. Banks generally provide a grace period for you to clear your EMI default. Failing this, after 90 days you will be automatically added to the Defaulters list if you continue missing the EMI payments.

Loan Defaults

  • Major defaults

Major defaults are when the borrower has missed payments for more than 90 days. When the pending payment crosses the 90-day period, the loan is added under the Non-Performing Assets (NPA) group.

  • Minor defaults

Minor defaults are when the non-payments are less than 90 days. Borrowers with minor defaults can recover from the negative impact on the CIBIL score due to this.

Consequences of Missing EMI

  • CIBIL Score

The first and foremost thing will be the effect of the default on your CIBIL score. Banks and Financing firms prefer customers with CIBIL score 750 or more to sanction their loans. Every EMI missed will lead to a decrease of 50 to 70 points of your CIBIL score. This will also become a black mark on your loan repayment history. The lending firms will report your defaults to the credit bureaus which will further affect your CIBIL score negatively.

  • Creditworthiness

The credit report does not come with just the CIBIL score but also with comments on your repayment history. Loan refusal to individuals with CIBIL scores above 750 is usually due to this fact. The missed EMI dues make you a risky borrower in the eyes of the lenders who will not want to loan the amount to someone who may not follow the terms of repayment.

  • Higher interest rates:

Defaulters are considered a risk and will be charged a higher interest rate for loans in future as you will be marked as a risky borrower due to the history of missed EMIs on your credit report.

  • Penalty Fee

Almost all banks and financial firms charge a late payment fee when you miss an EMI. The penalty amount may vary between 1% and 2% of the EMI amount that is due.

  • Loan Recovery

The loan recovery procedure differs from bank to bank and between various private financial lenders. After the usual 90-day period given to the borrowers to clear the defaulted payments, the bank may issue a notice after which the loan will be marked as NPA. This notice period is usually a 30 or 60-day period depending on your lender. Some institutions may send a loan recovery agent to check up on the borrower personally. These are situations that can be extremely embarrassing and stressful and should be avoided.

What to do when you miss an EMI?

Here are some things that you can do when you find yourself in a situation where you are unable to meet the EMI due a particular month.

  • Ask your bank for help. Talk to your loan officer and find out if they can allow you to pay your due the following month. Explain your situation and in case of emergency like a health crisis, assuring the bank that you will pay both months’ instalments might get you off with only a small late payment fee.
  • In case your situation is long-term and you find yourself not able to pay the EMI dues for more than one month, you can request your bank for an extension. These will apply when you have suddenly lost your employment or facing a pay-cut, etc. Talking to your bank can lead to a solution for your problem instead of the defaults piling up on your plate. See if you can restructure your payment plan.
  • Failing all that, you can take a loan against your personal assets like gold, fixed deposit or personal insurance. A loan with collateral is secured and will only require a lower interest rate. This will give you some breathing space as you can settle this later. The loan against the personal assets can help you clear your EMI defaults for loans of higher amounts.
  • The last resort will be requesting your bank for settlement. Repaying a part of the loan makes it a settled loan. However, a settled loan will be negatively reflected on your credit report. Meanwhile, the other options that we learned about earlier will not have that much of an impact on your credit history.

Take all these under advisement before you make any decision. Even with these options to pull you out of a sticky situation like this, it is always better to be prepared beforehand. Start an emergency fund that will serve as a backup for any unexpected event.

How to Avoid Loan Defaults?

You cannot always predict what will happen and not happen in your life. Even with all the extensive ideas and plans, we might get stuck in a difficult financial situation at some point. So here are some tips to handle them better.

  • Plan your finances better
  • Restructure your loan

If you foresee a difficult month or months, you can approach the bank like we talked about before and request for your loan to be restructured. Lowering your EMI and extending your tenure period can get you out of defaulting on the EMI payments. Doing this in advance is better than missing the EMI and then requesting the bank for an extension. Also, you can convert your loan into a secured loan with collateral. This will reduce your rate of interest. The reduction in EMI is significant for a secured loan when compared to just extending the loan tenures.

A high down payment will not only ensure the bank that you are capable of adhering to the repayment terms. It will also reduce your interest rates and the EMI payments. This will significantly ease the financial strain on you in the long term.

  • EMI-free period

In the unfortunate event of losing your job or facing a sudden pay-cut, you can approach your bank for an EMI-free period. After this period, you can resume the repayment of the instalments as usual.

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