What Will Happen If A Personal Loan EMI Bounces?

A personal loan is often the most common form of debt for an individual. Although the amount one can avail via a personal loan is restricted to a few lakh rupees at the upper end, it is approved quickly and does not need the borrower to provide a collateral.

A personal loan becomes essential if a person needs cash quickly. This could be to meet emergency medical requirements, pay for certain expenses like school fees for children or wedding expenses in the family or even a foreign holiday. In an ideal scenario one should keep a set of cash savings for emergency requirements but often such savings are not enough, necessitating a personal loan.

Personal Loan

This a simple loan where a person borrows money on the basis of his or her creditworthiness. It is an unsecured loan. This means it doesn’t require one to pledge, say, one’s jewellery as one would have to for availing a gold loan.

The money once sanctioned and disbursed becomes the principal sum borrowed. The borrower would need to not only pay it back in full but also pay interest and other loan processing charges as applicable.

This is done via equated monthly instalments, or EMIs. One can, of course, opt for auto debit from the bank account electronically. However, most people opt to pay post-dated cheques or cheques that become drawable only on or after a certain date in the future. This means if one has taken a personal loan for one year, every fixed date of a month, one of the cheques furnished for payment is presented to be encashed by the lender.

The EMIs comprise both a part of the outstanding principal as also some interest component. The EMIs need to be paid in full every month.

EMI Bounce

If a cheque is presented to the bank of the account holder, who is also a borrower, and it gets dishonoured or bounces, the borrower misses an EMI payment. If the person has opted to go and deposit the cheque on the due date every month and misses the date that, too, is seen as a missed EMI payment.

Also, even if one has opted for a direct debit and the balance in the bank account approved for an auto-debit associated with the loan is below the amount that needs to be paid as part of EMI liability, that too is considered a missed EMI payment.

All these situations have multiple implications.

• Missed Payment Penalty:

Lenders require the borrower to pay an additional fee for a missed payment. This is clearly mentioned in the initial loan agreement signed by the borrower.

• Delayed Payment Interest Charge:

If a cheque bounces or the borrower fails to deposit it on schedule or his or her bank account’s balance goes below what’s required to meet the EMI call, it tends to delay the EMI payment. This could mean delayed payment by a few days to a few weeks to even a few months.

In all of these cases, the lender would add the interest due as part of overall liability. Hence, when one does make the payment for the missed EMI, he or she has to pay additional interest rate due to cover for the period in between.

• Creditworthiness:

Most importantly, a missed EMI payment is counted as a big red flag in one’s credit history. It is marked in the credit report and also gets amplified as it lowers one’s credit score. This has repercussions for the future as lenders see such behaviour lowering the creditworthiness of a loan applicant.

This means if one has missed an EMI payment, especially so in the last 36 months, it affects a person’s new loan application. If the credit score is hit badly it could get a new loan application rejected. Even if one does get a loan sanctioned it may come along with a higher interest rate.

Conclusion

EMIs are a part and parcel of a person. This could be for buying a house, a car or via a simple personal loan to meet short-term cash requirement. It includes a part of the outstanding principal amount borrowed as well as interest charges on the loan. A borrower needs to pay EMIs on time and if one misses doing so it entails additional charges that increases the cost of the loan.

This includes delayed payment interest cost and bounce charges. Most importantly, it lowers one’s credit score that makes it difficult to borrow in the future and pushes up the cost of borrowing in the future with higher interest rate.

IIFL Finance offers personal loans of up Rs 5 lakh via a swift process that is entirely digital with competitive interest rates. IIFL Finance also customises loan repayments and offers easier options to help the borrower stick to the EMI schedule and pay back the loan without any financial stress.