Missed A Loan EMI? Here's How It Impacts Your Financial Health

Household debt in India went up to 42.9% of the country's GDP (at current prices) by the end of June 2024. This is a rise from 37.6% in March 2023. This means that Indian families took on more debt during this period, according to the Reserve Bank of India's Financial Stability Report from December 2024.

Household debt is steadily increasing across the country, and with it, loan defaults are becoming more common. The Reserve Bank of India (RBI) has urged borrowers to stay alert and adopt responsible borrowing habits to avoid falling into deeper financial trouble.

Missing even a single EMI (Equated Monthly Instalment) on your loan can lead to serious consequences. Financial experts are warning that failing to repay loans on time not only adds to your debt but can also damage your future financial prospects.

Below are five major outcomes of missing your personal loan EMI:

1. Credit Score Damage

Missing an EMI can reduce your credit score by 50 to 70 points. This drop can make it harder to get new loans or credit cards, and may result in higher interest rates in the future. A lower credit score reflects poorly on your financial discipline.

"Most lenders look for a high credit score of around 750 and to maintain a good credit score EMIs have to be paid on time. Missing EMIs not only leads to penalties but can also start a debt collection process. A damaged credit history could affect your chances of getting credit later," says Satyam Kumar, CEO & Co-Founder, Loantap.

2. Penalty Fees and Extra Interest

Banks and non-banking financial companies (NBFCs) usually charge a late fee of 1-2% of the EMI amount if a borrower misses a payment. On top of this, lenders also apply penal interest on the overdue amount. This means the longer you delay your payment, the more you end up owing - not just the original EMI, but also extra charges that add up quickly.

"Missing multiple EMIs can lead to high penalties and extra interest, making it harder to repay the loan and pushing you deeper into debt. Lenders may also see you as a risky borrower, leading to stricter terms or loan rejections. To avoid this, manage your finances well and use reminders or auto-debit to pay EMIs on time," explains financial planner Hemant Beniwal.

3. From Minor Delay to Major Default

If a borrower fails to pay EMIs for under 90 days, it is treated as a minor default. However, after 90 days, the loan is classified as a Non-Performing Asset (NPA). Once a loan becomes an NPA, it is flagged by both credit bureaus and lenders. This record can stay for years, making it hard to get personal loans or even credit cards.

4. Recovery Agents and Legal Action

After two months of missed payments, recovery agents may start contacting the borrower. If payments are not made, lenders may take legal action under the Negotiable Instruments Act of 1881. This can include court proceedings and more aggressive recovery efforts.

5. Reduced Future Borrowing Power

A history of missed payments and a low credit score can severely reduce your ability to borrow in the future. With personal loan defaults still high, especially in private banks, lenders may only offer loans at high interest rates and strict terms.

"Borrowers should be careful with their finances and make sure they repay loans on time. Keeping track of your credit score and loan status can help avoid long-term trouble," said Certified Financial Planner Navneet Dhawan.