Over the past few years, there has been a noticeable rise in individuals turning to personal loans as a financial solution for their diverse needs. Whether it's to finance major purchases, embark on a dream vacation, or consolidate existing debts, personal loans have gained popularity due to their unsecured nature and the ease of obtaining them with minimal documentation. Furthermore, the quick disbursal process and the added advantage of a flexible repayment schedule, typically spanning from 1 year to 5 years, make these loans all the more appealing to borrowers. The lending institutions, including banks and other financial agencies, understand their customers' varying financial capabilities and commitments. Hence, they offer the option for borrowers to select a loan tenure and EMI (Equated Monthly Installment) plan that aligns with their individual financial capacities and preferences. This flexibility is meant to ease the burden on borrowers and ensure a smoother repayment journey throughout the loan term. However, despite the best intentions and careful planning, life's uncertainties can sometimes lead to unforeseen challenges that disrupt a borrower's ability to make timely EMI payments. While missing one or two EMI payments might initially seem like a minor issue, it can negatively impact the borrower and their creditworthiness.
Consequences of failing to meet Personal Loan EMI Obligations:
One of the most apparent repercussions of not fulfilling loan obligations is a decline in your credit score. To qualify for a loan, most lending institutions require borrowers to have a credit score of 750 or higher. Even missing a single EMI payment can cause a significant drop in the credit score, usually ranging from 50 to 70 points.
1. Creditworthiness at Risk:
Aside from the credit rating, a borrower's credit report contains details about their repayment history. Even if the credit score is above 750, any comments regarding payment defaults in the credit report can lead to rejection when applying for a personal loan. Lenders often interpret such comments as a sign of risky borrowing behavior and doubt the borrower's ability to adhere to the loan's repayment terms.
2. Late Payment Penalties:
Late fees and penalties are common consequences imposed by banks and financial institutions on individuals who fail to make their EMI payments on time. The specific penalty amount may vary, but it typically hovers around 1% to 2% of the EMI that is due.
3. Loan Default Recovery:
As a last resort, if the default period extends beyond 90 days, banks and financial institutions may resort to sending recovery agents to collect the outstanding loan amount. Before declaring the loan account as a Non-Performing Asset (NPA), the bank usually issues a 60-day notice to the borrower. Needless to say, this situation should be avoided at all costs, as it can be highly stressful and disruptive.
Methods to Prevent Loan Defaults:
1. Effective Financial Planning:
To avoid the risk of loan defaults, borrowers should prioritize efficient financial planning and management.
2. Request for Reduced EMI:
If borrowers anticipate difficulty in making loan payments, they can proactively approach the bank to discuss their financial situation and request a lower EMI. Banks may offer options like extending the loan tenure or converting the unsecured loan to a secured one, resulting in reduced EMIs and lower interest rates.
3. Utilize Part Payments:
Making part payments whenever possible can help reduce both EMI amounts and the overall interest burden. This approach requires careful consideration of available funds and ensures the borrower's capability to meet the EMI obligations throughout the loan tenure.
4. Seek EMI-Free Periods:
During periods of income disruption, such as job loss or temporary business closures, borrowers can approach the bank for an EMI-free period. Many banks accommodate such requests by granting a 3 to 6-month waiver on EMI payments, offering temporary relief until regular income resumes.
Tips to Enhance Credit Score:
1. Ensure prompt payment of credit card bills to establish a reliable repayment history.
2. Consistently pay off loan installments in full and within the specified deadlines to demonstrate responsible borrowing behavior.
3. Maintain a credit card utilization ratio below 40% by using credit wisely and avoiding excessive debt.
4. Refrain from making frequent credit card applications, especially within a short timeframe, to prevent negative impacts on credit scores.
5. Avoid submitting multiple loan applications in quick succession to protect creditworthiness and minimize credit inquiries.
6. Keep old credit accounts active rather than closing them, as a longer credit history can positively influence the credit score.
While personal loans provide valuable financial support for significant expenses, maintaining a strong repayment track record is vital for securing future loan eligibility and financial stability. By adopting these preventive measures, borrowers can safeguard themselves from the pitfalls of loan defaults. Visit Loans Paradise today to know more!
