Are you in the process of buying a house or currently repaying a home loan? If so, you must be aware of the long-term commitment involved in servicing debts spanning 10 to 20 years. For many, homeownership is a dream, often made achievable through home loans. This instrument paves the way to owning a home, providing accessibility and affordability. However, what starts as a dream could potentially turn into a nightmare if home loan repayments are delayed.
Home loans serve as a practical and cost-effective method for financing residential property purchases, offering a diverse range of loan products tailored to various needs in the market. Choosing the most suitable option is pivotal.
Minor and Major Defaults
The consequence of delaying EMIs isn’t merely financial inconvenience; it carries legal implications as well. A minor default occurs after missing three successive EMI payments, prompting lenders to issue reminders. Should the delay persist beyond three months, it escalates to a major default. This designation grants lenders the authority, under the SARFAESI Act of 2002, to initiate the auctioning of the property to recoup outstanding dues.
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Penalty Charges
Beyond the legal implications, delaying EMI payments incurs financial penalties. Lenders typically impose penalties per month on the outstanding EMI amount, subject to a minimum specified sum. This additional burden compounds the financial strain on borrowers.
Credit Score Impact
Frequent delays or defaults lead to a significant decline in the credit score, affecting the borrower’s creditworthiness. A poor credit score not only affects the ability to secure future loans but can also lead to higher interest rates on loans due to increased perceived risk. For even a few days delay may lead to an impact on your credit score and defaults leave a negative impress on your overall financial health which takes time to rebuild.
Preventing EMI Delays
* Communicate with Lenders
It is essential to keep the communication going on. Should financial constraints arise, informing the lender early and discussing potential solutions like loan restructuring or grace periods can prevent escalation to default status.
* Emergency Funds
Building emergency funds can serve as a safety net during unforeseen circumstances, ensuring liquidity for timely EMI payments. Having an emergency funds of 6-12 months of your monthly income can help you overcome temporary financial stress. It will not immediately affect your loan repayments and you can work on other alternatives to repay your loan.
* Make Use of Savings
For temporary liquidity issues, borrowing from acquaintances or utilising FDs and other savings can help. Additionally, liquidating low-interest investments or considering withdrawals from long-term funds like PPF can aid in timely repayments. In more difficult financial situations where repayment seems unfeasible, considering downsizing homes or liquidating assets could be a viable option to avoid defaults.
Understanding the consequences of delaying home loan EMIs is crucial for borrowers. It’s not just about financial penalties; it’s about protecting your creditworthiness, financial stability, and future borrowing capacity. Proactive steps involve creating emergency funds, evaluating loan tenure, opting for moratorium periods, and maintaining communication with lenders to explore solutions like restructuring may provide some relief. However, planning and prudent borrowing based on repayment capacity are crucial to prevent EMI defaults.
(The author is CEO, Bankbazaar.com. Views are personal)