What Happens When Borrowers Miss a Home Loan EMI?

What Happens When Borrowers Miss a Home Loan EMI?


Taking out a Home Loan is a significant financial commitment. When borrowers sign the dotted line, they agree to make regular Equated Monthly Instalments (EMIs) to repay the loan over a set tenure. But what happens if they miss an EMI payment? Missing even a single EMI can have serious consequences that affect one's financial health and future borrowing prospects.

Immediate Consequences of Missing an EMI

When borrowers miss a Home Loan EMI payment, the first thing that happens is that their loan account is marked as delinquent. Banks and housing finance companies typically offer a 3-5 day grace period after the due date, allowing payments to be made without penalties. Failure to pay within this period results in various consequences.

  1. Late Payment Fees: Banks charge a late payment fee, typically as a percentage of the EMI amount or a fixed cost. These fees can add up quickly, especially if individuals miss multiple EMIs.
  2. Higher Interest Burden: Missing an EMI adds the unpaid amount to the outstanding loan balance, thereby increasing the interest burden due to the higher principal amount. Delaying payments results in more interest accruing.
  3. Legal Action: If an individual continues to default on EMIs, the bank may initiate legal action against them. This could involve sending legal notices, filing a case in court, or even initiating foreclosure proceedings to take possession of the mortgaged property.

Impact on Credit Score

The credit score is a numerical representation of the borrower's creditworthiness, and it plays a crucial role in future borrowing prospects. Here's how missed EMIs can affect the credit score:

  1. Payment History: The payment history is the most significant factor in determining a credit score, accounting for approximately 35% of the total score. Even a single missed EMI can have a significant negative impact on the credit score.
  2. Length of Default: The longer borrowers delay making a payment, the more severe the impact on their credit score. If EMIs remain unpaid for 30 days or more, it will be reported to the credit bureaus as a default, which can drastically lower the score.
  3. Difficulty in Future Borrowing: A low credit score can make it difficult for individuals to secure loans or Credit Cards in the future. Even if they do manage to get a loan, they may have to pay higher interest rates and face stricter terms and conditions.

Late Fees and Penalties

  1. Late Payment Fee: Most banks charge a late payment fee of around 2% of the EMI amount for each month of default. Some banks may charge a fixed fee instead of a percentage.
  2. Penal Charges: Some banks may charge an additional penal charge on the overdue amount. 
  3. Legal Charges: If the bank initiates legal action against the borrower for non-payment of EMIs, the borrower may have to bear the legal costs and expenses incurred by the bank in the process.

Bank's Recovery Process

If individuals continue to miss EMI payments, banks will initiate a recovery process:

  1. Reminder Calls and Notices: Banks will send reminder calls and notices to inform borrowers about the missed payment and request immediate settlement.
  2. Legal Notice: If they fail to respond to the reminders, Banks will send a legal notice demanding payment within a specified timeframe, typically 60 days.
  3. Asset Seizure: In the event of continued non-payment, Banks reserves the right to seize the mortgaged property to recover the outstanding dues.

Strategies to Avoid Missing EMIs

  1. Maintain an Emergency Fund: Build an emergency fund that covers at least six months of expenses, including EMIs, to tide over unexpected financial crises.
  2. Set Up Automatic Payments: Automate EMI payments through standing instructions or post-dated cheques to ensure timely payment.
  3. Opt for a Flexible Repayment Plan: Choose a repayment plan that aligns with one's cash flow, such as the step-up EMI facility offered by Federal Bank, where EMIs start low and increase gradually.

Steps to Take in Case of Missed EMIs

Maintaining clear communication with the lender and exploring repayment flexibility options can help navigate the challenging situation effectively. Take the following steps if an EMI payment is missed despite the best efforts:

  1. Communicate with the Bank: Inform the lender about the situation and seek their guidance on the best course of action.
  2. Pay the Overdue Amount: Arrange funds to pay the overdue amount as soon as possible to minimise the impact on the credit score.
  3. Restructure the Loan: If individuals are facing a prolonged financial crisis, discuss loan restructuring options with the bank to make the EMIs more manageable.

In Closing

Missing a Home Loan EMI payment can have serious consequences, from late payment charges to a lower credit score and potential asset seizure. Federal Bank, with its customer-centric approach, offers personalised guidance, flexible Home Loan repayment options, and a Home Loan EMI calculator to help stay on track with EMIs.