When taking a loan from bank, you commit yourself to make monthly payments. If you default, not only do you pay late payment charges but also run the risk of hurting your financial health in the long run. One such reader has defaulted his EMIs not once but five times. Our expert guides him on what to do.
Q. I have taken a loan of Rs 4 lakh from a public sector bank (PSB). I have not been able to pay the equated monthly installments (EMI) for five continuous months. My EMI is Rs 5000. Now, if I want to make the payment of all the five months together what will be the overdue charges?
A. There are a number of charges that can be levied:
Penalty charge
A PSB normally charges a penal rate of 1 to 2 per cent of your EMI if it remains unpaid for 30 days after the due date. So, you will have to bear this charge on the months when you defaulted your payment.
Cheque bounce charge
In case you have given post dated cheques (PDC) for your EMI payments and your account has had insufficient funds then you would have to pay additional bounced cheque charges too. This charge can range anywhere between Rs 250 to 400. In case of electronic clearing system, the penalty will be between Rs 100-150.
Now, if you are planning to make the payment of all the defaulted five installments together, you will be paying the charges as explained in the table below.
Miscellaneous charges
Apart from the above charges, there might be other miscellaneous charges that may marginally increase the amount. Also, in case of consecutive defaults banks have the right to increase the interest rate. Since you signed the agreement while taking the loan, you will not have much say in this. If such a situation arises, it may alter the complete nature of your debt situation.
Here is a description of the penalty charges you are likely to incur on EMI defaults.
TOTAL OUTSTANDING EMI (IN RS)
1
5,000
5,000
100 *4 = 400
5,400
2
5,000
5000+5400 = 10400
208*3 = 624
11,024
3
5,000
5000+11024 = 16024
320.48 * 2 = 640.96
16,664.96
4
5,000
5000 + 16664.96 =21664.96
433.29
22,098
5
5,000
5000 + 22098 =27098
Nil
27,098
In the table, a 2 per cent penalty charge will be imposed on the first month's EMI of Rs 5,000, which will be Rs 400. So, the outstanding amount to be repaid to the bank will be Rs 5,400. In the second month, another 2 per cent will be charged on the previous month's outstanding plus penalty charge (Rs 5400) along with the current month's EMI of Rs 5000. This total will be Rs 10,400 (5,400+5,000). So, the outstanding amount in the second month to be repaid stands at Rs 11,024 that includes 2 per cent on Rs 10,400. On this amount of Rs 11,024, another 2 per cent will be charged in the following month thus increasing the penalty to Rs 320.48 and Rs 433.23 in the third and fourth month respectively.
Since your fifth installment is within the due date there will be no penalty on it. So, the total outstanding EMI at the end of five months will be Rs 27,098. Now, if you club the EMI of the sixth month, your total repayment amount will be Rs 32,098 (27,098+5,000).
Assuming that you have been making the payment through PDCs, you will have to factor in penalty on bounced cheques too. If your bank charges Rs 250 for one bounced cheque, you will have shell out Rs 1,250 on five bounced cheques.
Therefore, the approximate amount payable to bank will be Rs 33,348 (1,250 + 32,098).
Consequences of defaulting
Low credit rating: Defaulting your EMIs will adversely affect your chances of getting another loan in future. Every loan and credit card transaction is tracked by Credit Information Bureau (India) Limited (CIBIL); and defaulting even a single EMI will affect your credit rating, which can make your chances of getting a loan slim.
Recovery agents: Banks will consistently follow up on your EMI delay, which can be very stressful. Some banks employ external means such as recovery agents to get the payments. It's best to avoid a situation where an agent comes knocking at your door enquiring about repayment delays. This could turn out to be a very embarrassing situation. It's best to plan your finances with some foresight before applying for your loan.
So, when you decide to apply for a loan, don't forget to take into account your other financial commitments such as monthly household expenses, other existing loan EMIs, money for emergencies, etc. Ensure you have enough money saved (atleast three months EMI) to avoid a strain on your monthly budget. Take utmost care to avoid defaulting on your EMIs.
Abitha Deepak is Head of Content & Research at BankBazaar.com - An online marketplace where you can instantly get loan rate quotes, compare and apply online for all your personal loan, home loan and credit card needs from India's leading banks and NBFCs.
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