When you buy your first house, you stretch yourself financially and drain all of your savings. You also aim to secure the largest possible home loan in order to purchase the most property possible with the available funds. Home loans are long-term liabilities that need monthly payments for at least 15-20 years. Your financial obligations change dramatically over the years, and you may find yourself unable to pay your house loan EMI. Though most lenders would be willing to be flexible if they were informed of a scoresingle default in advance, repeated defaults can have serious effects. If you miss an EMI, you may be compelled to pay the difference together with the next month’s EMI.
However, if you miss one or two EMI payments due to unforeseen circumstances, it will not be a huge concern. In this instance, the bank will issue an immediate warning. If you miss three EMI payments in a row, it will be deemed a red flag. The bank will identify you as defaulters and notify you. Furthermore, if you have a good payment history and reasonable causes, the lender may provide you a grace period. In contrast, the default will have a negative impact on your online CIBIL Score.
Various Consequences of Home Loan Default
If you fail on your house loan in India, the following are some of the repercussions you may face:
Late Charge
You will be charged late fees, penalties, and, in certain situations, punitive interest if you fail on your house loan. The punitive interest is usually 1-2 percent of the EMI. As a result, depending on the circumstances, you may be required to pay punitive interest on the whole outstanding balance throughout the default term. This is in addition to any late fees levied by the lender.
Collateral Possession
Banks and financial organisations commonly label a loan default as a Non-Performing Asset after three consecutive EMI defaults (NPA). As a consequence, they began the debt collection process under the 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act). You receive a legal notice and have 60 days to fulfil your commitments. Banks, however, have the authority under the SARFAESI Act to seize your collateral if you do not pay your obligations within 60 days. Under the SARFAESI Act, your collateral can be taken without a court order.
Auction of Collateral
If you do not pay the loan within 60 days, the bank will give you another notice indicating the value of the collateral, whether real estate or jewellery, as well as the date of auction. If the collateral is a life insurance policy, the insurer receives the profits before the lender does.
Influence on CIBIL Score
Even missing one EMI payment will display on your credit report, lowering your credit score. A single loan default might knock 50-70 points off your credit score. This has an impact not just on your credit score, but also on your creditworthiness for future borrowing. With a poor credit score, you may be unable to qualify for the finest home loans or best credit cards in India. Banks see you as a high-risk borrower, which reduces your chances of obtaining a loan. Even if you are given a loan, it will be subject to stringent terms and restrictions.
Conclusion
To avoid house loan default, you might ask your lender for a lower EMI and more efficient financing. If you have a financial shortage, you might approach the lender and request an EMI-free period. If you have lost your job or temporarily discontinued company operations, banks may grant you a three- to six-month EMI payment relief. The lender, on the other hand, has the option of charging interest on the outstanding loan amount at a later period. Another option is to make partial payments to reduce the EMI burden. This is possible with the aid of a home loan overdraft. Making a partial payment to your overdraft account may reduce your financial stress if you have additional money and an active house loan.
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