Missing personal loan payments won’t land you in jail, but it can cause significant financial stress and damage your future credit opportunities. Here’s what can happen:
- Credit score damage: Late payments can significantly damage your credit score, which is a numerical representation of your creditworthiness. Negative marks from late payments indicate to lenders that you are a riskier borrower. This is because details regarding payments are reported to credit bureaus (Experian, Equifax, and TransUnion) and can remain on your credit report for up to seven years, depending on the severity. A bad credit score makes it difficult to qualify for loans (mortgages, auto loans, etc.) or results in much higher interest rates. This means you end up paying more for the money you borrow.
- Late payment fees: Late payment fees are the most common consequences of missing a personal loan payment. Depending on the lender, the late payment fee can be a flat amount or a percentage of the missed payment (typically around 1-2%). The exact amount varies based on your loan agreement, so it’s important to review your loan documents to understand the specific late payment fee policy. Late payment fees increase the total amount you owe and can further strain your budget, making it even harder to catch up on missed payments.
- Higher interest rates: Missed payments can result in the unpleasant surprise of increased interest rates. In addition to your original interest rate, some lenders may impose a penalty Annual Percentage Rate (APR) for late or missed payments. This raises the effective interest rate you pay on the remaining loan balance, leading to a higher monthly payment and increased borrowing costs. For instance, even a slight increase in interest rate can add hundreds or thousands of dollars to the total repayment amount over the loan’s duration.
- Debt collection process: Dealing with debt collectors can be quite troublesome, and it’s a scenario you’d prefer to steer clear of. If you consistently miss payments over an extended period, your lender may classify your account as “in arrears”. This indicates that the loan is overdue, and they haven’t received payment for a considerable period.
At this point, the lender may opt to sell your debt to a collection agency, which is a third-party firm specialising in recovering unpaid debts. Collection agencies often use frequent phone calls, emails, and letters to urge you to repay the debt, which can be stressful and feel intrusive. Besides the stress, having a debt in collections is reported to credit bureaus, worsening your credit score. This makes it more challenging to obtain loans or favourable interest rates in the future.
Penal interest and charges are designed to encourage responsible credit behaviour among borrowers. Recent regulations from the Reserve Bank of India (RBI) have stressed that these charges should be fair and not employed solely to generate extra income for lenders. The objective is to foster responsible borrowing practices rather than imposing excessive penalties on borrowers.
Frequently Asked Questions (FAQs)
Q. What are the consequences if I miss too many payments on my personal loan?
If you miss too many payments on your loan, the lender may transfer your loan to a collection agency, which can cause stress and further harm your credit score.
Q. What steps should I take if I’m having difficulty making my loan payments?
If you’re struggling to make payments, reach out to your lender promptly. They might be able to assist you in devising a repayment plan.
Q. Do all lenders have the same penalty structure?
Different lenders impose varying penalty structures. It’s crucial to carefully review your loan agreement to comprehend the specific late fees, potential interest rate hikes, and debt collection protocols. These penalties for late payments are contingent upon the lender and the terms stipulated in your loan agreement, which outline the late fees, potential interest rate adjustments, and the debt collection procedures the lender may employ.
Q. What are the requirements to qualify for a personal loan?
Approval for a personal loan usually hinges on factors like your credit score, income, and debt-to-income ratio. A higher credit score and a lower debt ratio generally increase your chances of approval and help you secure a more favourable interest rate.
Q. Is it permissible to utilise a personal loan for business-related expenses?
Personal loans are typically intended for personal expenses, although certain lenders may permit their use for small business requirements.
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Published: 22 May 2024, 11:35 AM IST