Buying a new home is more of a luxury these days, given the sky-high home prices. Purchasing a house is one of the most significant investments in most people’s life. However, not everyone has enough savings to pay for the house in one go. Most of the time, people opt for home loans. These loans are indeed a great way to purchase your dream house. However, it is essential to plan the repayment of the loan.
Like other loans, the lender charges interest on the principal amount borrowed. One must choose the right loan tenure and Equated Monthly Instalments (EMIs) for repayment. Missing an EMI payment can lead to severe consequences, including financial and legal implications. Let’s learn more about housing loan EMIs and the consequences of missing the same.
What is a housing loan EMI?
A housing loan EMI is a fixed sum paid by the borrower each month throughout the loan tenure. It contains a fraction of the principal amount and the interest charged on the outstanding loan. Not being able to pay the home loan EMIs can lead to severe consequences. In most cases, the lenders issue a warning to the borrowers. However, repeated defaults can lead to legal and financial penalties. It also hurts the borrower’s creditworthiness measured by the credit score. Therefore, using a housing loan EMI calculator is highly recommended to choose a suitable tenure and EMI amount.
Consequences of EMI defaults
Now that we have a fair idea of what a home loan EMI is, let’s dig deeper into the consequences of defaulting on EMI payments.
1. Low credit score
One of the biggest damages that EMI defaults can cause is in the form of a low credit score. Missing an EMI payment can negatively impact the borrower’s credit score. The credit score measures a person’s creditworthiness in the market. A good credit score can give you favourable terms on a loan, such as a lower interest rate. It also measures your financial stability. Late payments, defaults, and missed payments can cause a significant drop in a borrower’s credit score, making it difficult for them to secure credit in the future. Therefore, they are deemed high-risk borrowers.
2. Legal penalty
Missing EMIs consecutively for two or more months can also lead to legal action from the lender. Depending on the terms of the loan agreement, a lender reserves the right to take legal action against a borrower who defaults on their EMI payments. Some of the legal actions that lenders can take include legal proceedings, such as sending a legal notice, filing a case in court, or even seizing the property. These legal proceedings can be both time-consuming and expensive for the borrower and can have long-term financial implications.
3. Late payment fine
Housing loans offer ample loan amounts to the borrower. However, at times, the borrower may miss EMI payments, leading to a fine imposed by the lender. A late payment fine is one of the most prominent and immediate consequences of defaulting on home loan EMIs. The lender imposes this fine as the basic penalty so that borrowers don’t default in the future. These charges can vary depending on the lender and the outstanding loan amount. Generally, the late payment charges can vary between 3% to 5% of the EMI amount. This charge is accumulated in the next EMI, which the borrower has to pay.
4. NPA status
Non-Performing Assets (NPA) is a term used in the banking and financial space for borrowers who repeatedly default on their loan repayment. A non-performing asset can turn into a bad debt. Therefore, the lending party can take steps to recover the outstanding loan amount from the borrower. Missing three or more EMIs can lead to an NPA categorisation. The lender also reserves the right to auction the property and recover the dues.
How to handle EMI defaults?
Financial emergencies can come anytime, and they might lead to an adverse situation, such as default on EMIs. However, you can remedy this situation by planning things well and informing the lender about your situation. The first step that you must take is to contact your lender and update them about the situation. Lenders have a lot of methods to help borrowers during financial distress. It includes loan restructuring, extending the repayment period, offering a moratorium period, etc. You must aim to pay off the dues as soon as possible.