Equated Monthly Instalment (EMI) is a fixed Monthly Instalment which is made by the Borrower to the Lender of the Loan. EMI is paid to set-off the Interest and the Principal Amount. The benefit of an EMI is that the borrower knows precisely how much money they will have to pay towards their loan each month which helps an individual to keep a track on their expenses and savings.
Irregular payments of loan or failing altogether to pay your EMIs dues can have consequences detrimental to your financial plans and management. The following consequences may arise due to non-payment of your loan or EMI:
- Interest Rate Hike – If you have a payment default on your credit card EMI/loan and you continue to make purchases from the card in-spite of it, the interest rate on services like cash withdrawals or credit card EMIs might be hiked.
- Credit Score gets Affected – The defaults in payment of dues are updated by the banks to CIBIL which negatively affects the credit score. A knockdown effect of your credit score getting negatively affected is that any current or future applications for new credit cards or loans may get rejected. Specially, in the case of loans, a bad credit score can result in you being offered loans at a very high interest rates as compared to the loan rates in the market at the time.
- Dealings with Recovery Agents – If you fail to make payments on time, the case gets forwarded to the banks which will regularly follow up with you for recovering the Loan due for the payment and shall cause a lot of Harassment.
- Loss of Credit Limit – Excessive defaults in EMI will result in a reduction of credit limit which restricts your spending power for transactions.
In such a situation where you are not able to repay the loan due to your financial condition, you need to have a conversation with your Bank Lender. Based on your case, intent and genuineness, banks may look for some feasible solutions that are mutually acceptable. Banks benefit as this agreement prevents an addition to their Non-Performing Asset (NPA) portfolios and borrowers also benefit as they get to retain the acquired money/asset.
Here are a few options an individual can consider in case of not being able to pay your EMIs:
- Loan restructuring: In case of housing loans, banks have a provision for restructuring. The bank must perceive a genuine reason of default. If a borrower is unable to maintain the terms of the loan, he/she can request the lender to relax the same. This may lead to a reduction of charges, lowering of interest rate, lengthening of the loan tenure, a moratorium on interest, etc.
- One time settlement: You can enter into a one-time settlement if the bank agrees. This is a good way to end your loan if you have some money or cash flow is about to come, as usually such settlement will be done at lesser value. That means the bank may waive off some amount.
- Debt rescheduling: If the bank feels that the quantum of EMI is creating a problem after analysing his/her financial position, they may decide to have their debt rescheduled by extending the loan tenure. This will bring down the monthly EMI commitment though it will mean they end up paying more interest in the long term. One can even prepay their loan, closing it early and saving excessive interest outgo.
- Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow and you want to seek temporary relief for a few months from your bank. Banks can accept these as genuine reasons but may also charge penalty for not paying within the time frame agreed initially.
- Loan conversion in Unsecured Loans: You can opt for converting an unsecured loan to a secured loan by offering a security, which should bring down the rate of interest.
- An alternate method which you can adopt is Minimum Amount Due (MAD). The person only has to pay the minimum amount to the bank by the deadline and this is followed to keep a regular account and to avoid payment of any late payment fees. Payment of minimum amount due ensures that you only have to pay the interest. This is done so that the bank does not report the account as irregular.
BANKRUPTCY
Bankruptcy is the legal status granted by the court to an individual or company which is unable to pay off outstanding debt. Personal bankruptcy is considered as a final resort for those caught in the loop of Default Payment as going bankrupt is a way to wipe out majority or all debt obligation. But when you are bankrupt, your non-essential assets and excess income earned will be used to pay off the creditors.
The court, when satisfied with the claim, appoints a financial manager who shall be an intermediary between the debtor and the credit institution. He shall evaluate the borrower’s income and property and creates a plan for restructuring the debt that the court later approves. The restructured debt would be significantly less and the debt which was initially and it will be easy for the debtor to pay it off. It is pertinent to say that creditors do not have the right to demand the payment of loans from individuals who file for personal bankruptcy.
CONCLUSION
Hence, if a person is proved to be Bankrupt by the court then it shall be decided by the Court that the individual cannot pay the Interest or the EMI, and hence the court shall waive off the debts and EMI or may in another scenario provide the extension of time to the individual so that he/she can pay at least the Minimum Amount Due, which would not make the individual’s account irregular.