The time is very crucial because with the burden of EMI building up on borrowers, there can be a lot of reasons for a person to miss an EMI payment. Let us start by discussing how the EMI burden has gone up whether it is personal loans or home loans or car loans. How much has the EMI burden gone up?
It depends from bank to bank, from where they have borrowed. In tier-1 banks, there is a marked increase in unsecured loans that people have borrowed, especially the personal loans. As for home loans, there is enough data out there on how much the increase has been. We are talking about anywhere between Rs 3,000-5,000 for every Rs 50 lakh that people have borrowed.
But more than that, what is a little worrisome now is that people have taken loans when they thought that the rates were continuously sliding down. But we have had situations where the rates have been going up steadily and not everybody is in a situation where they can get an increase in tenure. So if the increase in the tenure is not happening, then obviously the EMI is going to go up. So it is those profiles that one is a little concerned about. The chances of them missing this EMI is a little high.
So let us discuss the reason why a person would actually miss paying an EMI. Obviously, not being able to afford to make the payment could be one of the reasons. But a lot of time, people forget, or behave recklessly and think they can pay it next month. But the danger of missing an EMI is that it will impact the credit score. Also, there could be penalties and even legal action.
I will break it down into two categories. Say you have missed paying your EMI on your due date but managed to pay within 10-15 days, you are still all right. You are not going to be penalized for that because most of the banks today are a little lenient.
But you have missed an entire cycle, that means you have missed one month’s EMI, then immediately two things happen; a), Next month, suppose your EMI for this month was Rs 10,000 and you missed this, then you are going to be paying this 10,000 plus the next month’s 10,000, which is Rs 20,000 already. Plus, you are going to pay some kind of a penalty for having missed out on this, which depends on what kind of loans you have taken.
So if you are able to salvage it by next month, you are still all right. But if you are not able to salvage, and this missing continues and spills over to the third or the fourth month, that is where the downward spiral starts because it starts to balloon. And then, if you are not in a position to pay month one, then obviously you are nowhere in a situation where by month four you are going to be paying all of this, unless you know you are going to liquidate some asset or do something else.
So the immediate effect of missing an EMI is that there are going to be penalties and charges. When we talk about penalties or charges, what exactly is the figure? How is it decided, and how much penalty will you have to pay on your EMI amount?
In the case of personal loans, obviously the penalty charges are higher. But when it comes to home loans, there are three charges there. There is something called a check bouncing charge or bounce charge because the lender has come to hit your account, and there is no money there. So they charge you something like Rs 750 or 850, irrespective of the loan amount. So that is one charge. Then the second charge is anywhere between 0.25 to 0.75% of the loan outstanding. And the third charge there is usually a late payment fee, which is, again, something like Rs 1,000 to 1,350.
So, all in all, you are talking about another Rs 7,000 to 8,000 of excess outflow, if you have missed one EMI.
If you miss an EMI, how do you accumulate interest and then what is the severe impact of it on your EMI amount?
On a home loan, you are still in a better shape because in 2-3-4 months the lender is a okay if you go back and say that you are in trouble and ask them to rework the EMI,. Since the ticket size is usually bigger, the lender also does not want an NPA as far as the home loan is concerned.
However, there is a big dent on your credit score and credit profile and everything if you are defaulting on your personal loan and you are continuously missing your credit card payments.
Now, credit card payment is not an EMI, but that is your credit card bill and if you are continuously missing all this, then that is really going to impact you very highly. The credit card outstanding can be anywhere between 2% and 3% per month which is compounded. So it only multiplies from there.
You also spoke about legal action that could be taken. After missing, how many EMIs do you get a legal notice?
Normally, this process is a little longer. It does not happen overnight. Typically, 30 days, 60 days, 90 days, those are the buckets where the banks usually are doing the collection calls themselves because your account has still not become an NPA. It is only when it crosses that 90 day, that the account is classified as an NPA. And then it depends. It either goes to a collection agent’s bucket so there is a good long journey there.
First, they try to recover. Then they try to arm twist you or force you to pay. Then there are collection agents that call on you. By then, they figure out. So, by this time, there is a good five, six months of missing EMIs, credit card bills or loans that we are talking about. That is where they try and come back to offer a settlement with you, where you do not have to pay the whole amount but you kind of settle. Then there is a return of cycle. And it is much, much later that the lender decides to file a suit against you for not paying. So, there is a long gestation period between you starting to default and facing the legal action.
Which also includes your property being seized?
Yes. So, the lender gives you enough chance to see how he can salvage the situation for you before they get into the auction story. Today, the NPAs that we are seeing, the asset reconstruction companies (ARCs) are buying portfolios. A lot of water has flown under the bridge before the whole auction and recovery process starts because even for the lender, this is an additional expense. A) They have already made a loss on their loan that they have given. B) They have to further incur expense to get this asset auctioned. So, they try and see how much they can support you so that you get back on track and pay them back.
In what category of retail loans have the maximum NPAs been reported so far?
Personal loans and that is my biggest fear because today all these online lending, these buy now pay later, holiday loans, biryani loans and all are in reality personal loans. They may be giving you the loan under whatever name but fact is, this is all personal loan. So, the percentage of personal loans that are being defaulted upon is continuously on the rise.
What is the impact of missing EMIs on the credit score? First of all, how many EMIs do you have to miss for it to reflect on your credit score? Is it just missing one EMI irrespective of the kind of loan you have taken?
The credit score or credit profile is a very cyclical thing. If you make the payment after a delay of 5-10 days, nobody reports you and you get away with it. But if you default by 30 days and miss a month, you are already reported. So, in your entire credit profile history, this 30-day delay is always going to be reflecting saying that this person had taken this loan and defaulted by 30 days. So, anything 30 days and above is going to cost you dearly.
Let us talk about the severe impact on your credit score and the way you can rectify it. Obviously, one way to do it is just by making your payments on the normal timeline and if your credit score has really gone very bad, then maybe you need to figure out and approach people who can help rectify that. What is that stage? When do you go out and seek help?
Do not get conned by other people who are trying to pull up a fast one. When there is a delayed payment track record in a credit report, that never ever gets erased. So, if somebody is going to tell you that you pay me Rs 50,000 and I am going to clear all your old bad track record, it does not work. The person is trying to con you.
So, please remember, if you continue to miss your EMIs, it is going to be part of your history till the time that you are going to be looking for loans or cards or somebody just going to check your credit report, maybe your employer, maybe your owner, when you are trying to rent a property. This part is always given.
When a person is only making late payments, there are two situations. Some people on a regular basis make late payments because they do not get paid on time or are self-employed. So cash flow situations are there. They are not defaulters, but they are late payment people. Overall, in the loan there is no default. They have not missed any payment, but they have continuously, consistently made late payments. These are one category people.
The second category people are those who have defaulted and obviously there is late payment. Now, this is where there is room for improvement. There is room for rectification and a lot of things can be worked around and made sure that this profile is set right. In both situations, we will have to take a look, understand where the person is coming from, what is the issue and then go and represent him rightly to the lender and sort this case out.
What tips would you want to give a person when they are thinking of taking a personal loan? Obviously it is a strict no-no, but if that is the last thing, a last resort that you really have to go for and there is nothing else that can be tried, what will be your tips?
Point number one, however desperate you are, if somebody is offering you a loan with an interest at 24%, 28%, please do not sign up. It is okay, I do not know what your scene is, but then you know that you are going to be getting into a pit with your eyes open. It is very difficult to sustain this kind of repayment, unless you know that within a month or two, you are going to do something or sell off something or get rid of some outflows and you know you are going to be doing a transfer of this personal loan.
But at the same time, please remember that in the case of a foreclosure of a personal loan, again, there is a penalty. So, if it is 24%, 28%, please, please, please do not get into those loans.
Number two, personal loan is always a very short duration loan. You know that you will have to repay this typically between two and four years. You can’t be sure that you are going to get that 10% salary hike next year or bonus and that is how you will repay it. So, be very realistic at the current scenario, given your current income and your expenses plus the contingencies, see if you can sustain the loan and only then take the loan.
Of course, if you have already signed up for a personal loan, then there are two things you can do. Please see if there is any way you can reduce your cash outflow so that you do not falter on this EMI. Two, if that is not possible, see if there are any other avenues wherein you can make some extra buck or some dud insurance policies or against which something can be borrowed. That at least will be cheaper than this 24% to 28% interest rate. Please do not falter on your personal loan EMIs.
The third thing is a lot of people have this credit card dues which is like a big chunk. Then the credit card company gives you an option where it says, can we convert this into an EMI for you? This again is nothing but a personal loan that you are going to be paying for six months, nine months, whatever. There, again, because it is a credit card due that has been converted into a personal loan, the rate of interest obviously is higher.
So, if you can stretch yourself and repay this earlier, then do not unnecessarily sign up for 9 months and 12 months. See, if you can stretch yourself and repay this in six months and get your act together. That is another personal loan which is a very bad personal loan. Go for it only when you know your credit card bill is hitting the roof and there is no way you are going to be able to repay that in a month or two.