People often take out home loans to buy their dream homes. However, if you miss a monthly payment, you might face consequences like paying the missed instalment and the next month's payment together. And in most cases, the consequences are both in terms of finance and reputation.
You will face late fees, penalties, and sometimes penal interest. “Penalties typically amount to one to two per cent of the EMI. However, in certain situations, you might have to pay penal interest on the entire overdue amount for the default period instead. This adds to the late fees imposed by the lender, resulting in a significant total amount,” Adhil Shetty, CEO, BankBazaar.com said.
“Missing a home loan EMI can lead to various consequences such as late payment fees, increased interest rates, a negative impact on credit score, and potential legal action by the lender to recover the outstanding amount,” Atul Monga, founder and chief executive, Basic Home Loan, a fintech company for home lending in India said.
First, you would incur additional charges. These charges vary depending on the kind of loan you have taken for your home. Next, your credit score would be impacted. And finally, you risk losing your home if you fall far behind your repayments.
“The damage to your reputation can be severe. When you miss a single EMI payment, it gets noted in your credit history, affecting your credit score. A single default on your home loan could drop your score by 50-70 points, making you ineligible for future credit opportunities,” Shetty added.
Yet, if you've missed an EMI within 90 days of the last payment, it's considered a minor default. You can bounce back from its effects by taking immediate corrective steps. Clear the missed EMI on the next due date and commit to not missing any more EMIs.
The late fee, usually a percentage of what you owe, kicks in the day after your payment is due. Your lender might also inform credit bureaus about your late payment, potentially affecting your credit score. He suggests contacting your bank or lender to explore options and arrange alternatives if there's a possibility you might miss an EMI payment.
If you fail to make repayments on your home loan or any other loan for which you've used your property as collateral, your bank could seize your home. This includes instances where you haven't paid the EMIs for an extended period. “Banks typically initiate the process of seizing the property after repeated defaults on EMIs and failure to resolve the outstanding dues through negotiation or restructuring,” Monga added.
“If you find yourself in such a situation, it's crucial to communicate with the lender immediately, explain the reasons for the missed payments, and explore options such as loan restructuring, deferment, or settlement to avoid foreclosure and protect your property. Seeking professional financial advice can also be beneficial in navigating through this challenging situation,” Monga added.
Banks typically allow a grace period of two months or more for you to catch up on missed instalments after sending a legal notice. If you continue to default, the bank will send an auction notice stating the estimated value of your property. If you don't resume home loan payments before the auction date, usually one month after receiving the notice, the bank proceeds with auction procedures. Throughout this process, you can approach the bank anytime to negotiate a settlement.
To prevent a home loan default, you can ask your lender for a reduced EMI and manage your finances better. If your income stream stops, you can request an EMI-free period from the lender. They might grant a three- to six-month break on EMI payments if you've lost your job or paused your business. However, they may charge interest on the remaining loan balance afterwards.
You can also reduce your EMI burden by making partial payments using a home loan overdraft facility. Whenever you have extra funds and an active home loan, putting some money into the overdraft account can help ease your financial strain.
