This is usually the first step any lender takes in case of delay in EMI payment.

Owning a home is the dream of many of us. For that many take loans from banks and financial institutions. But if there is a delay in the home loan repayment, the dream of owning a house remains a dream. Taking a home loan is a cheap and easy way to arrange the funds required to fulfill the dream of owning a home. There are many types of home loans available today.

Getting a home loan is very easy if you have the right documents. But paying off debt properly, with financial discipline and proper planning is not that easy. Even one default in home loan EMI payment can affect the borrower in many ways.

Here’s a look at the consequences of defaulting or delaying home loan repayments and some ways to pay EMIs on time.

NPA account
If you do not pay your EMI for three consecutive months, it will be treated as a small default. In such cases, the lender will remind you about the repayment. But the problem becomes more complicated when this delay continues again, i.e. when you are unable to pay the home loan regularly. Delay in payment of EMI for more than three months will be considered as major default.

The lending bank or company may initiate the process of securitization and auctioning of your assets under the Rehabilitation of Financial Assets and Security Interest Enforcement Act (SARFAESI), 2002.

In case of delay in EMI payment, the first step any lender usually takes is to levy a penalty of 1% to 2% of the outstanding EMI amount. If found to be a persistent defaulter, i.e. delay in EMI payment for more than three months, the bank may register your loan as NPA and then initiate the recovery process.

Generally, banks send notice before marking the loan as NPA. Sometimes banks appoint agents as third parties to recover money from NPA accounts. This may seem like a shame to borrowers. Finding a way to repay the arrears is a requirement of both the lender and the borrower. The law also states that there should be no threat or humiliation against the borrower. Treat them with respect. If the borrower has taken any other loans from the same lender, even if the EMIs have been duly paid, those will also be treated as NPA accounts.

Impact on credit score
Failure to pay home loan monthly installments can adversely affect credit score. If the borrower is late in paying the EMI, his credit score will go down. Nowadays, most banks revise their loan interest rates at regular intervals. The interest rate is usually calculated based on the repo rate and the credit score of the borrower and is adjusted based on the risk premium. Therefore, a lender may increase the interest rate for a low credit score. This will also be reflected in the borrower’s credit report. It also reduces the borrower’s chances of getting another loan in the future.

Transfer and New Loan Rejection
If you want to transfer your home loan to any other bank or financial institution, the new lender may reject your application due to default in EMI payments. Other loans like personal loans, car loans can also be difficult to get.

How to avoid late payment of home loan installments?
If your financial impact is temporary, you can borrow from friends or relatives to repay the EMIs. You can pay the loan amount by taking overdrafts from your fixed deposits or life insurance to pay the EMI. But also remember that this money has to be deposited back into the overdraft.

But if you are facing an indefinite financial crisis, you can withdraw money from fixed deposits or other liquid funds to repay the EMIs on time. You can also consider withdrawing money from your PF contribution or long-term investments like Public Provident Fund (PPF).

If the financial situation is unlikely to improve soon, the house can be sold. There are also options like moving to a small house or rented house or sell assets like gold, car etc.

A loan insurance plan can be purchased to cover EMIs for a short period of time. Some banks and financial institutions offer such insurance plans at the time of lending. Such insurances are useful when you are unable to pay your EMIs due to job loss or temporary cessation of income.

Build emergency savings and investment to ensure you have enough money to pay EMIs on time in adverse financial situations. It is better to plan such things before taking a loan. Only borrow as much as you can afford to repay.

Talk to the lender and find a solution. They can consider options like debt restructuring, concession, grace period and debt settlement.