Home Loan: What are the penalties if you miss your home loan EMI?

Home loans allow a person to get their dream home without having to pay for it all at once. With long tenures and tax benefits, the option is the most popular one when it comes to buying houses. Home loans are based on Equated Monthly Instalments (EMIs) which need to be paid every month. But, borrowers can end up missing their EMI payments due to several factors such as cash crunch, a medical emergency or other reasons. While missing out on a single payment can be rectified with some measures, there can be adverse effects on your finances if you repeatedly do not pay the instalment. 

Here is a brief explainer of what can happen if one misses their home loan EMI payment.

Consequences of missing EMIs:

Credit score gets reduced: Pending EMI payments can lower a borrower’s credit score. This means that the person will be less likely to get loans and credit cards at favourable interest rates in the future. Most financial institutions consider a score of over 750 to be a good one. A borrower’s credit score may fall

Extra penalties: For each EMI missed, borrowers will have to deposit penalties and late fee in addition to the pending amount. The penalties are usually 1 to 2 per cent of the loan amount. A penal interest, over and above the regular one, will also be levied. These charges can increase a person’s financial burden and may lead to a debt cycle.

Borrowers get a grace period to repay any pending dues. If the money is not submitted, the loan will be classified as a Non-Performing Asset (NPA) by the lender. This will give the financial institution the legal right to auction off the borrower’s property or collateral under the framework of the SARFAESI Act of 2002 to recover the dues.

How to avoid defaulting on EMIs:

Make a budget and stick to it: Ensure there are enough funds to pay back all dues. Make a budget of expenses and income and cut down on unnecessary transactions. This will help save money for the EMI payment.

Automate EMI payments: Enable the automatic debit option on the home loan EMI. This ensures that the payments will not be missed.

Refinance the loan: If an individual is unable to make their EMI payment due to job loss or any emergency, they should contact the lender and request altering the terms in light of their financial condition. Refinancing the loan, be it a longer tenure or some other change, will help get EMI payments back on track.