What are the consequences of missing a home loan EMI? (And how to get back on track?

10 दिसम्बर 2021

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A home loan can help you finance the purchase of your dream house. These loans are usually of a high value and, therefore, longer in tenure as well. Lenders typically sanction only 75% to 90% of the cost, and you are required to save enough to make a down payment of the remaining amount. You pay back the amount borrowed through a home loan EMI payment. For many individuals, procuring a home loan is the only way by which they can afford to buy a house. Home loans also provide significant tax benefits to the borrower.

For many individuals, Home Loan EMI pay-outs make the majority of their monthly earnings.

Loss of employment or any other financial emergency may see you miss a few payments on your home loan EMI . However, it is important to not panic in such situations and take proper steps in order to bring your payment strategy back on track.

What if home loan EMI is missed? What are the consequences?

There are two major consequences of missing your monthly home loan EMI payment. Firstly, your CIBIL score would go down for each month of default. Secondly, the subsequent month’s EMI payment will become quite expensive. Here is a look at the consequences in detail.

The monetary impact of missing a home loan EMI payment

For each missed EMI payment, you will be required to pay late fees, penalties, and penal interest. The penalties are usually 1% to 2% on the overdue amount. You might even have to pay penal interest. The penal interest is charged over and above the regular interest in your home loan . This increases the interest pay-out significantly. You will have to pay the missed EMI amount as well. As a result, your upcoming EMI will become quite expensive and harder to manage. You typically get a grace period to pay off your dues, after which your loan is classified as an NPA (Non-Performing Asset). Once your loan has been classified as an NPA, the lender has a legal right under the framework of the SARFAESI Act of 2002 to auction your property or collateral to recover their dues.

The impact on your CIBIL score

 Your CIBIL score undergoes considerable damage when you miss your home loan EMI payments. CIBIL score Your goes down by 50 to 70 points for each EMI payment that you miss. If you have a CIBIL score of 750 and miss out on two of your home loan EMI payments, your score drops down to anywhere between 610 to 650 points. This takes away your status as a responsible debtor. A lower CIBIL score makes it harder to procure loans in the future and increases the interest rate that you get charged by lenders. A drop in your CIBIL score can also make you ineligible for credit in the future.

How do you get back on track after missing a home loan EMI payment?

If your defaults have not crossed the grace period provided by the lender, you can get back on track with ease.

What do you do to get back on track before your dues cross the 90-day period?

If your dues have not crossed the grace period, you can follow the steps listed below to get your EMI payments back on track.

Step 1

Contact your lender as soon as you realise that you will not be able to make the upcoming EMI payment.

Step 2

Make a budget and stick to it. Once you have contacted the lender about your issue with repayment, the next step is taking their response into account and drawing up a budget accordingly. Account for your monthly expenses and income. This practice will help you identify the areas where you are spending extra and assist you in meeting your EMI obligations.

Step 3

Cut down on your expenses. After creating a detailed account of your monthly cash inflow and outflow, you shall be able to judge which of your expenses can be reduced. It is better to stay away from buying luxuries and spending extra on your wants rather than your needs until your finances are back on track.

Points to consider

  • Many loan providers in the market today understand the uncertainties of life and often advise you to take a loan insurance policy. These policies offer to cover your home loan EMI for up to three months if you default due to loss of employment. However, it is important to keep in mind that this is only applicable in the case of a lay-off or health reasons. The insurer will not cover your home loan EMIs if you are fired due to poor performance.
  • Lenders usually give you a notice after you have missed EMI payments. If the default continues and stretches for more than 90 days and consequently your account has been classified as NPA, the lender has the legal right to auction your house in order to recover the money. However, you still have a chance to save your house after that. All you need to do is clear your dues before the auction process begins. Do keep in mind that you would have to pay the lender the expense related to initiation of recovery process as well.
  • Taking the legal route and auctioning your property is quite a tedious task even for the lender. Thus, it is used as the very last resort for recovering NPA. Creditors prefer to follow up with the debtor and provide as much support as they can to help clear the dues.

Conclusion

Before taking on home loan debt, you need to understand your finances and formulate a strategy on how to pay home loan EMI. Missing a home loan EMI payment can lead to significant financial damage. Thus, it is better to do calculate your home loan EMI before you start the application process. You can use an online EMI calculator to help you with this calculation. Knowing how much you will have to pay each month will help you avoid defaulting on your repayments. On the other hand, if you are unable to pay the EMI due to a sudden emergency like a job loss, it is recommended that you contact your lender as soon as possible and be completely transparent about the issue with them. They will discuss all possible alternatives to help you get your payments back on track.

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6 Effective ways by which your CIBIL Scores can Improve

One of the most important prerequisites for taking on any kind of loan today, is your CIBIL score. Whether it is a home loan, a vehicle loan, a personal loan or any other kind of loan
Applicant, banks always check one’s CIBIL scores. Also known as credit score; this is a document containing information about the borrower’s credit behaviour. Banks use potential borrowers’ credit scores to check whether or not they have been repaying their loans on time. Through the CIBIL scores they can check if a borrower has defaulted on any loan payments, missed paying any EMI and even get an idea regarding one’s financial conditions. If your credit scores are below 750 most lenders reject loan applications. So it is imperative to have good credit scores. Find out how to improve CIBIL score here.
Repay your debts on time
Whether it is your credit card bills or your loan EMIs, it is imperative that you repay your debts well in time. Missing out on repaying any outstanding debt can impact your credit rating. You especially need to be careful when it comes to paying loan EMIs because failure to do so, not only attracts penalties, but also affects your credit scores negatively. One easy way to pay your debt on time is to set reminders so that you don’t forget the loan repayment dates and never miss out on making timely payments. You can also set up automatic payments so that the loan amount is directly debited from your savings account every month.
Don’t take on multiple loans
A great way to improve CIBIL score is to ensure you do not take on multiple loans at the same time. Ensure that you’ve paid off your current loan before taking on another one. This prevents your credit scores from reducing. When you take on several loans at the same time, it shows your lender that you may not have sufficient funds to repay all of them. If you have only one loan to repay, the lender can feel confident in giving you the loan and your credit scores also remain unaffected.
Try to maintain a healthy mix of credit
Most people have to take on a variety of loans to fund the various life necessities. But when you take the loan, it is better to ensure that there is a healthy mix of secured and unsecured loans. While the home loan and car loan count for a secured loan, your credit card debt or personal loans are regarded as unsecured loans. It is necessary to maintain a balance since taking any loan in access can affect your credit rating.
Don’t utilize your entire credit limit
Another important point that pops up when we talk about how to improve credit score is credit limit utilization. One of the quickest and the easiest ways to improve credit scores is not utilizing your credit card to the extreme limit provided by lenders. Try to spend only 30% of the credit limit provided on your card per month. For instance, if you have a credit limit of ₹200,000 per month, you should try to restrict your monthly credit spends to only ₹60,000. When you exceed the 30% limit, your potential lender may get the idea that your spending habits are impulsive, which can also reduce your credit scores.
Increase the credit limit
If you demonstrate good credit repayment behaviour, your bank can reach out to you to increase the credit limit on your credit card. It is better not to turn down this increased credit limit. Increasing the credit limit doesn’t necessarily mean that you are going to increase your credit card spends. The idea is to have a higher credit limit but limiting your credit utilisation, and thereby improve CIBIL score. Doing this leaves a positive impact on your credit scores.
Ensure that your credit report is error free
While you may believe that your credit report is free of errors, there may be several unknown errors that may be reducing your credit score. For instance, you may have paid off your personal loan in full, but you may see that it is still unpaid owing to administrative errors. It is therefore important to check your credit score and ensure it is error-free before you apply for a loan so that your loan request is not rejected, thus further impacting your credit scores.

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