What Happens If You Don’t Pay Your Loan EMIs? A Step-by-Step Breakdown

It is always advised to pay your EMIs on or before the bill payment due date to maintain a healthy credit score and avoid a situation that can drastically diminish your chances of getting a new loan or credit card.

• Skipping your EMIs can cause a lot of unwanted trouble that can break your access to credit facilities and jeopardise your periodic financials.
• Repeatedly delaying or missing EMIs can lead you to a debt trap as you’ll be subject to high interest rates and penalties.

Consequently, the total outstanding will double in size, especially in the case of unpaid credit card debt.

What actually happens if you don’t pay your loan EMIs?

Halting your EMIs has a snowballing effect as issues keep increasing if you don’t restart the EMIs within 90 days. Let’s take a look at the successive drawbacks of missing EMIs and halting loan repayment.

Heavy Penalties

Lenders don’t shy away from levying penalties, especially if everything has been communicated to the borrower before issuing the loan or credit card.

• In the case of a home loan, non-repayment of home loan EMI may attract a penal interest of up to 2% of the outstanding EMI, the interest accumulates very quickly if you leave it unpaid.

For a car loan, a lender may levy a penal interest rate of up to 3% in case of non-repayment of car loan EMI. A largely similar penalty is levied on non-repayment of personal loan EMI that remains subjective to the respective lender.

• However, non-repayment of credit card dues can be severely damaging as penal interest rates on outstanding balances range from 3 to 4% for most credit cards.

This translates into an annual percentage rate (APR) of 36 to 48% p.a. Even if we assume an APR of 36%, the outstanding will nearly double in a matter of 24 to 30 months.

Late Fees

Over and above the penal interest charges, lenders also levy a one-time late fee for every missed EMI on the amount equivalent to the outstanding EMI.

• The late fee may fall in the range of 1-2% of the outstanding EMI up to a certain amount.

You should continue to remain highly cautious with all your repayments, as a couple of misses can seriously impact your overall credit profile while increasing your net financial burden in terms of penal interest and late fees.

• All the bills and outstanding should be paid in their entirety, preferably before the bill payment due date.

In case you’re not in a position to pay the total outstanding then you must clear the minimum balance due at least to keep your credit card up and running as it can help in avoiding the late fee. The outstanding balance should be cleared off by the next billing cycle as larger unpaid dues can trigger your finances and steer you towards a debt trap.

Interest Accumulation

Penal interest over the total outstanding is very taxing as in some cases, lenders levy interest over outstanding principal + accumulated interest.

• In case you’ve only paid the minimum balance due, the next month's EMI will be much dearer as it will include the penal interest on top of the outstanding balance, alongside the spends in the current billing cycle.

You may get an exception on serious financial hardships or instances of bankruptcy, otherwise, it is never a wise decision to jeopardise your financials by spending beyond your earnings capacities and then ultimately skipping the repayments or EMIs.

Credit Score Damage

Your credit score gets a heavy beating on account of missed or deferred loan or credit card EMI as lenders report the non-repayment to the credit bureaus and subsequently the event gets recorded in the credit report and your credit score drops by 25 to 100 points, basis the severity of issue and quantum of outstanding balance.

Once dented, credit score takes a considerable time to get back to normal as such misses are duly noted by lenders and financiers with the credit bureau red-flagging your repayment behaviour.

• Your credit score may drop even further if the credit utilisation is also in the higher bracket and you’re receiving unusually high enquiries for new credit accounts.
• The damage from multiple sides could become irreparable as you can’t undo such adversities in a month or two.

As a result of an extreme drop in your credit score, all your credit cards will get blocked and you’ll no longer be entitled to use them whether on a PoS or online payment gateways.

New Loans & Credit Cards: Ineligible

You become an enemy in the credit market once your credit score is damaged beyond quick recourses and repairs. With an unpaid outstanding balance, you are ineligible for new lines of credit, be it a personal loan, home loan, or car loan.

• The situation may get worse so much so in some cases, that lenders deny fresh credit even if the borrower is applying for a loan against property, a loan against shares, etc.

However, the chances of such instances are rare. In case you are reeling under a heavy debt burden, you may choose to take a loan against gold or a loan against FD as the loan-to-value (LTV) is higher for both these categories.