People could take loans for multiple reasons like consolidation of a debt, to make some home improvement, pay for the wedding, buy a car, to pay their bills, support their education and medical finance, etc. A personal loan is of great help to an individual, who is intended to pay for something but does not have availability of enough funds upfront. But what happens if one is not able to repay the loan on time? Unlike Ostrich we cannot keep our heads in the sand waiting for the storm to pass. What are the consequences of missing EMIs? What are the alternatives to avoid missing EMIs?
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If you miss your EMI?
Getting loans is easy these days, paying them back on time often becomes challenging for example job loss, the primary breadwinner falls sick, unexpected expenditures affect EMI payments. it would help if you evaluate whether you will be able to pay the EMIs on time before you take a loan. Your total EMI should not be more than 40-50% of your take-home salary.
A missed EMI is classified as a minor default if the last payment is within 90 days or less. Late fees penalties are levied when one misses paying an EMI on time. The penalty is usually around 1% to 2% of the EMI. You have to pay the missed EMI along with the penalty and the next month’s EMI, in the next cycle. Borrowers who have minor defaults on their loan accounts can recover if they take the right timely action. Pay off the missed EMI on the next due date and ensure that you do not miss any further EMIs.
A missed EMI is considered a major default if you have not made any payments in the last 90 days or more. When your loan account has a major default, it’s marked as an NPA (Non-Performing Asset). It gets noted in your credit report and can impact other loans in the future. A single default can bring down your credit score by 50-70 points
Harassment by recovery agent: This is the worst-case scenario and most stressful of all these consequences. Banks and finance companies sometimes send recovery agents to visit you at your residence or workplace and collect the due amount from you.
Ways to Avoid Missing EMI Payments
Maintain an emergency fund
You should maintain an emergency fund for the financial crises. The emergency fund must hold around three-six months of your salary. This way, you can use this fund to pay for your household expenses and EMIs if something unexpected happened to your income flow. few ways to help you plan your finances better and pay your EMIs on time.
Approach Lender and discuss alternatives
If you suspect that you won’t be able to pay the upcoming EMI on time, you need to take action. Approach your lender before the due date and explain your financial circumstance. you can request the lender to
- Pause EMIs
- Reduce the EMI increasing the loan tenure
Most lenders honor these requests by borrowers, especially when they have not defaulted before.
Seek the help of friends and family
You can approach your friends or family for a loan(at low interest or interest-free) to help you repay the EMIs. You can later pay back the loan amount, once your financial situation recovers.
Individual voluntary arrangement
Many of us do not know, what is an IVA. In simple words, a formal and legally binding agreement between you and your creditors to repay your debts over a period is known as an individual voluntary arrangement. This means the court has approved it, and your creditors must follow it.
An IVA can be established in a variety of ways. It might be a monthly payment plan over a set period (usually five years) or a short-term payment plan if you have a lump sum to put up. While some of the IVAs include both installments and a lump sum payment.
Who is eligible to apply for IVA
An IVA can be used by anyone with a significant unsecured debt problem, but it is especially beneficial to persons who possess assets since it allows them to try to protect assets that might otherwise be vulnerable in bankruptcy. The same might be said for persons who want to protect their income because an IVA is especially useful if you work in a field where bankruptcy is not an option.
An IVA is a formal alternative to bankruptcy that allows you to make an agreeable agreement with your creditors without fear of facing professional sanctions. To be eligible for an IVA, you must have a ‘provable’ source of income. As a result, you can work for yourself or someone else, be a limited company director or part of a partnership, or even be unemployed or retired and living off your pension.
What are the benefits of IVA
The following are some of the advantages of an IVA:
- It’s legally binding, which means your creditors must follow it and won’t be able to pursue you for the debt once the IVA is in place.
- It’s just for a set period, and you only have to pay back what you owe while the IVA is in effect – usually 5 or 6 years.
- Creditors are usually sympathetic if you simply pay a portion of the debt.
Kind of debts included in IVA
The most common debt payment covered by IVA is credit cards, overdrafts, personal loans, utility arrears, catalogs, store cards, and payday loans. Secured debts (such as mortgages or other loans secured against the property) and some other debts (such as college loans, child support, fines) will, nevertheless, need to be paid individually outside of the IVA.
IVA and its impact on life
An IVA is an insolvency procedure that might have a variety of consequences for your financial condition. From the time the agreement is reached, your credit rating will be impacted for six years. Your IVA will be listed on the Individual Insolvency Register in England and Wales, or the Register of IVAs in Northern Ireland, during this time.
You’ll have to stick to a budget that you and your provider have agreed on, and if you fall behind on any payments, your IVA may be extended to compensate for the missed payments. An IVA is an effective solution to your debt problems. Once you get rid of your debts you’ve got control of your finances again and you can spend your money any way you like. Paying off all the debts with peace of mind is a great milestone indeed, therefore always approach a reliable platform/source to get debt advice.
Missing loan EMIs leads to several negative consequences. So, make sure that you pay your EMIs on time.