What is the Penalty for Delay in Repayment of Loans?
Taking a mortgage is a big financial responsibility taken by borrowers. Once the loan is sanctioned and disbursed, it’s entirely the borrower’s responsibility to timely repay the EMIs and complete the loan’s repayment as per the tenure chosen. However, there are times in life when a borrower ends up failing to pay the EMI by the due date, whether due to unforeseen financial difficulties or sheer negligence and carelessness. In such scenarios, delay or default in loan repayment has multiple adverse implications in the borrower’s financial life. Late payment charges are among the most obvious penalties borrowers have to pay upon delaying repayment of loan EMIs. Let’s discuss all this in detail to get a clear idea regarding such delay’s impact on the borrower.
Levy of Late Payment Charges
Lenders levy late payment fees when the borrower delays in payment of the loan’s EMI. This fee is mostly 2% per month. While this may not seem to be a huge amount to worry about monthly, annually, this comes out to be 24% p.a., which is certainly a hefty charge. Let’s understand the calculation and impact to get a fair idea.
Assuming you have a mortgage amounting to Rs. 40 lakh at an interest rate of 10.5% p.a and tenure of 20 years. Your EMI turns out to be approximately Rs. 39,935. Now, if you miss even one EMI payment, you would be liable to pay a late payment charge of almost Rs. 799 (2% per month).
Know the Calculation Behind the Late Payment Fee
The lender levies this fee on the overdue amount, and the penalty amount that comes out also depends upon the period of default taken into consideration. The more delay the borrower does in EMI payment beyond the due date, the higher the fees go on piling up. Also, remember that apart from late payment fees, the lender also tends to levy EMI bounce charges, which are levied on the return of cheque or insufficient funds in the account, due to which EMI payment couldn’t be successful. The lender can also levy EMI default charges on delaying or failing to make payment of EMI of loan.
Financial Implications of EMI Delay or Default
Adverse impact on credit score
Delay in EMI payment of loan gets reflected in your credit report. As this is a form of irregularity in repayment and depicts a lack of discipline in behaviour towards the loan, the Credit Bureau pulls down the borrower’s credit score upon such delays/defaults. Lenders would be more cautious in lending further to such borrowers, given that delay in EMI would indicate this might happen again as well. They must lend at a higher interest rate, provide a lower credit limit on credit cards, or at worse, reject the application due to higher credit default risk, especially if the borrower’s credit history has displayed frequent EMI delays.
Reduces future borrowing capacity
As a reduced credit score lowers a borrower’s creditworthiness, it impacts overall financial health and credit eligibility and approval chances in the near future. Whenever a borrower applies for a loan or credit card, the lender would fetch his/her credit report from the bureau to assess credibility. Upon scanning the borrower’s credit history and seeing the delay in EMI payment, lenders would be apprehensive in lending to the applicant, as his/her borrowing capacity would be hampered due to low credit score. Even if the lender decides to go ahead and accept the loan or credit card application, they may probably lend a smaller loan amount, charge a higher interest rate to make up for higher credit default risk, and give a lower credit limit in case of a credit card.
Losing possession of pledged collateral/asset
In the case of secured loans, repeatedly delaying EMI payment and eventually defaulting on the loan can lead to loss of pledged asset/collateral. Lenders have the right to take possession and even auction your asset/pledged collateral upon default to recover the outstanding dues.
Legal actions and harassment by recovery agents
In the case of loan defaults, especially unsecured loans, the worst-case scenario is when the lender takes legal action of sending loan recovery agents to visit the borrower and make all possible attempts to recover the money. Generally, lenders go for this extreme recovery agent option only when the loan is classified as a non-performing asset (NPA). Repeated visits from recovery agents can not only be stressful but embarrassing as well for the borrower.
Lowers chances of loan balance transfer
Another financial implication of loan default is that irregular repayment history and delays can hamper the borrower’s chances of finding a balance transfer facility when required. Hence, the borrower ends up missing out on the chance of switching to the lender with a lower interest rate and better service terms on the existing loan, given that the new lender would put such borrower in a high-risk category, and hence be apprehensive about accepting their application.
How to Avoid Loan EMI Delay or Default?
It’s natural to be worried about loan EMI delays and defaulting on the mortgage. In such scenarios, it is always prudent to take timely and right steps instead of panicking. No one would wish to pay the late payment fees and other associated charges that result in burning a hole in the borrower’s pocket. So, some possible options that can be explored by the borrower are:
Utilise emergency fund
Borrowers who have existing adequate emergency funds should utilise them to pay their EMIs when facing difficulty. Doing so would prevent the loan from slipping into default and creating further financial problems for the borrower.
Communicate with the lender
If the borrower does not have any existing source to pay the EMI, they must speak to their lender earliest and convey the financial issues being faced. Communicating with the lender would help in mutually working out a solution that benefits both lender and borrower. Hence, do not delay and quickly contact and negotiate with the lender to know how to solve such financial crunch situations.
At Shriram Finance, our main motive is to provide the best services and possible solutions to our customers, especially during their financially tough times.
Possible solutions that lender may provide when the borrower faces difficulty in EMI payment include:
Lower the EMI amount by extending the tenure
Lenders can help borrowers handle financial crunch situations wherein paying the EMI is getting difficult. One of the most common steps lenders take to work things out is by extending the loan tenure, thereby reducing the EMI amount. The reduction in EMI amount can prove to be a relief to the borrower if the new EMI is manageable to be paid. However, given that longer tenure would mean overall higher interest cost on loan, borrowers should try to prepay the loan whenever they have surplus funds in the future, during the loan’s tenure.
Postpone the EMI payment
Another way out that the lender may offer is the postponement of loan EMIs, but that is only when the lender is convinced that the delay and non-payment of EMIs is a temporary situation of the borrower.
Borrowers must evaluate their finances carefully not only before applying for a loan but also during its repayment. During loan repayment, borrowers need to manage their finances judiciously and repay the loan EMIs timely. One of the most suitable and prudent ways to tackle financial exigencies that make it difficult to repay loans and other expenses is by maintaining an adequate emergency fund ideally amounting to at least six times of mandatory monthly expenses. This would assist in continuing existing expenses and repayments during difficult times. Also, a crucial way to avoid paying the late payment charges even if facing a financial crunch is to be patient and avoid panicking. Then, look for possible ways to handle the EMI payments through possible sources, and if still not succeeded, contact the lender at the earliest to get workable solutions before things get more complex.
We at Shriram Finance are dedicated to being transparent and finding all possible ways to assist our customers during loan repayment. Whenever facing difficulty, quickly contact us to get the right and suitable solution. Contact us for any inquiry, and we will be eager to assist you.