Ahome loan default can have severe repercussions on your current and future finances. It can impact your creditworthiness, making it difficult for you to borrow in the future. Here are the consequences of defaulting on three consecutive home loan EMIs which you must know about.
First default
After the first EMI default, the bank will send you a payment reminder via SMS and email. The reminder may also include a link directing you to make the payment online. The lender may charge a delay penalty of 1-2% on the outstanding loan amount along with the EMI due. Once you make this payment, your loan account will resume as before.
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Second default
The second EMI default will result in a warning from your lender, asking for immediate payment of the EMI amount, including the penalty charges. You may be allowed some time to make this payment based on your financial situation. However, a second default will alert the bank, which may initiate legal proceedings in case of third EMI default. If you are in such a situation, make the two delayed EMI payments immediately to restore your loan account.
Third default
If you default on your third consecutive EMI payment, the bank will mark it as a minor default, for which you will continue to get reminders. However, if you miss EMI payments beyond 90 days or three months, the lender will initiate proceedings to auction off your property to recover the dues. Adhil Shetty, CEO, Bank-Bazaar.com, explains, “On delaying an EMI, the first action that a lender normally takes is to impose a penalty that is 1%-2% per month on the outstanding EMI and is subject to a minimum prescribed amount. If you commit a major default, the lender will mark your loan as an NPA and initiate a recovery procedure. Typically, the banks send a notice before they mark a loan as an NPA.”
Lenders may involve third-party agents for loan recovery of NPA accounts. “The NPA can have a cascading effect on the lender-borrower relationship. If the borrower has availed any other loans from the same lender, those loans may also get tagged as NPAs despite timely EMI repayment,” adds Shetty.
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How EMI defaults impact your credit score
If you default on three consecutive EMIs and further delay the payment of outstanding dues for more than 90 days, the lender will report it as a major default to the credit bureaus. This will reflect as an NPA in your credit report, making your credit score dip sharply and adversely affect your future borrowings.
When faced with a financial emergency affecting loan repayments, borrowers often hesitate to communicate with their lenders. However, you should stay in touch with your lender in such a situation. They may be able to offer you alternate repayment options such as a grace or moratorium period, restructuring your loan, or loan settlement.
An adequate emergency fund is an ideal fail-safe in such situations. You can also consider home loan insurance to protect your family during unforeseen circumstances threatening your loan repayment capability. Most importantly, explore all available options and decide based on your circumstances.
Late payments
* If you miss EMIs beyond 90 days, the lender will initiate proceedings to auction off your property to recover the dues
* Delay in payment beyond 90 days will result in an NPA, making your credit score dip sharply
