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You may eventually "default" on your loans or credit cards, and it's critical to understand the consequences of missed payments or defaults.

When you take a loan from a lender, you enter into a legal obligation to repay the debt in accordance with the terms agreed upon. While you intend to repay the loan, finances may not always work out as expected.

While you may be financially secure, life can throw you off track in many ways—a job change or a health crisis might suddenly take you off course. These occurrences will have a detrimental influence on your finances and may result in missed loan or credit card payments.

You may eventually “default” on your loans or credit cards, and it’s critical to understand the consequences of missed payments or defaults.

What happens if you fail to make an equated monthly installment (EMI) payment on a loan?

As one might expect, missing a payment (whether on a loan or a credit card) has repercussions. The specifics vary according to your scenario (loan kind, the extent of non-payment, etc.), but you can generally anticipate a bad reputation for your credit history.

The immediate impact on your credit score

The first and most obvious effect is the entry of such defaults on your credit record. When your lender reports such defaults to the credit bureaus, this has a negative effect on your credit score. Such entries make it more difficult to obtain loans in the future because they cast doubt on your creditworthiness.

Your guarantor’s / co-credit applicant’s profile gets impacted too.

If you have requested someone to act as a guarantor or co-applicant on your credit application, their credit score will also be impacted similarly. They will also receive calls seeking repayment of the loan, as they have assumed responsibility for ensuring that the debt is returned.

Possibility of asset repossession

In the event of secured loans such as car loans or mortgages, a loan default may result in the lender going for the asset repossession or claim procedure. This typically occurs under extreme circumstances, as the claim procedure differs by a different lender.

Greater financial load

While missing a loan payment may seem like the comfort that month, it adds to your credit strain in the months ahead. The loan EMI, interest, and late fees will continue to accumulate on top of your already large debt.

Points to note

If you notice that your finances are deteriorating to the point that your loan EMIs may become delinquent, it is prudent to contact your lender immediately before the situation worsens. Notifying them in advance demonstrates accountability and warns the lending institution to be prepared and, if feasible, allow you some breathing room.
Lenders may provide loan restructuring programmes, EMI holiday programmes, and tenure extension programmes that result in lower EMIs, among other things. This will vary for every lender, and your credit history with the lender will also be considered.

Certain employers have financial hardship programmes in place to assist team members. If you are still employed and unclear whether this is a viable option for you, ask your company’s human resources department.