- What is Loan Overdue Amount?
- Know everything about the Loan Overdue and how it can impact your credit score
Many of us don’t hesitate to go for a loan when we need funds to fulfill our various needs and financial emergencies. Lenders provide different kinds of loans such as Personal Loan, Home Loan, Car Loan, Gold Loan, etc. Customers repay the loan amount along with the interest charged by the lender via Equated Monthly Installments (EMIs). But sometimes, due to some unforeseen circumstances, customers face some financial crunch and are unable to repay the loan on time. The loan amount which customers fail to repay on time is known as the Loan Overdue Amount.
As it is clear from the name itself, the Loan Overdue Amount is the amount left unpaid even after the due date of payment. Let’s say a customer needs to pay a personal loan EMI of INR 9,000 on a particular date. If he fails to pay this EMI amount until the due date, this amount will be the Loan Overdue Amount. The lender will start charging an overdue interest rate on this loan overdue. So, if an individual keeps missing his or her EMI payments for a long period, the Loan Overdue Amount can get bigger due to various penalties and additional interest on late payment. Banks typically charge 2% per month as the additional interest rate (Penal Interest Rate) on late payment in case of a personal loan.
The concept of Loan Overdue remains the same in the case of all loans (secured and unsecured) as every loan needs to be repaid on time. However, the interest rates and penalty charges may vary from one lender to another. Now that you know what loan overdue is, you would want to know its effects on an individual’s financial life. Keep reading to know more!
Effects of Loan Overdue on Your Credit Report & Overall Finances
It is advised to always pay your loan EMIs on time. If you even miss a single EMI, it can hurt your financial life. When you have a loan overdue amount, it affects you in many ways. We are showing some of the important ones so that you can understand better. Have a look.
Impact on Credit Report
Suppose you take a 20-year Home Loan and pay your EMIs on time. But after two years, due to some financial stress, you are unable to pay your EMI on time for the first time in your tenure. The lender reports each of your transactions to various credit bureaus and any of the missed repayments will reflect on your Credit Report. A single missed repayment does not affect your credit report that much. But let’s say, you missed your EMIs for the last 3-months, it will be counted as the Non-performing Asset (NPA) and will show as Default on your Credit Report that will ultimately impact your credit score negatively.
Mention of Loan Overdue because of the missed repayments could lead to rejection of credit applications in the future as lenders always check the credit report of an individual to check his or her past repayment behavior before disbursing a loan or issuing a credit card. So, it would be advisable to always pay your Loan on time. For this, you must choose the loan amount according to your need and repayment capacity.
Penal Interest Rate
A customer should always make sure to have a well-defined repayment strategy before going for a loan. The reason: as we told that Loan Overdue Amount affects your credit score. But that’s not it; delay in the loan EMIs would also result in penalties from the lender.
You must be thinking how? Well, as you know you need to pay a fixed EMI amount every month. So, for each EMI you miss, you will need to pay a late payment fee in the form of Penal Interest defined by the lender. This additional Penal Interest Rate can vary from one lender to another according to the type of Loan.
Simply put, the penal interest rate is a kind of penalty charged by the lender if a borrower is unable to pay the EMIs on time. It doesn’t matter whether you missed one EMI or more than one, you will need to pay the Penal Interest on the same. This penal interest is charged on the Loan Overdue Amount monthly. For example, if a lender is charging a penal interest rate of 24% per annum, the customer needs to pay a penalty of 2% on the Loan Overdue Amount for every month of default.
Let’s understand this with an example. Suppose an individual has a 5-year personal loan of 8,00,000 at an interest rate of 12.99% per annum. The EMI for this amount would be INR 18,198. Now, if this EMI is delayed by a month, what would be the late payment penalty?
On taking Penal Interest Rate of 24% per annum, the late payment penalty would be INR 362. Apart from this, applicable GST of 18% will also be levied on the late payment penalty. So, the total penalty would be INR 390.96 (362 + 28.96).
Loss of Security
If you have taken a Home Loan or any other secured loans such as Gold Loan, Loan Against Property, Loan Against Securities (Shares, Mutual Funds, Bonds, etc.), the loan overdue amount can also result in the loss of your security. Let’s understand this more simply.
In any case of a secured loan, the loan can be treated as the Non-performing Asset (NPA) if the loan overdue amount is accumulating from the last 3 months i.e. the borrower has not paid the EMIs for the last 90 days. So, in such instances, lenders usually send reminders and 60-day notices about the Loan Overdue Amount. If an individual fails to repay the Loan Overdue Amount within the notice period, the lender has the freedom to sell the assets you pledged as the collateral. But there’s one important thing here; lenders still have to serve another 30-day notice before the auction.
This notice will mention all the details regarding the auction such as the Current Value of the Asset (done by the Valuer of the Lenders), Auction Date & Time, etc. The borrower can challenge the auction if he or she feels that the asset is undervalued. Also, lenders are liable to return the excess money (if any) to the customers after the recovery of the Loan Overdue Amount.
Shall I Settle the Loan Overdue Amount?
The first and foremost customers should do when they are unable to pay the loan overdue amount is to contact your lender from where you have taken the Loan. You can tell the details about your situation and why you are unable to pay the EMIs. The lender may offer you an extended tenure so that you can repay the loan amount without any trouble. As we said before, you should get in touch with your lender as soon as you receive reminders and notices about the repayment and try to find a common ground. This common ground can also come in the form of a One-time Settlement.
This condition usually happens when lenders feel that the borrowers will be unable to pay the loan overdue amount (NPA Condition) and it is better to find a convenient amount that customers agree to pay. But you need to remember that on making a one-time settlement, this will reflect on your credit report as the Settled Loan Amount. It might or might not reduce your credit score. But when you look for an unsecured loan in the future, lenders will see the ‘Settlement Tag’ in your credit report, which could force them to reject your loan application as the previous loan was not paid fully.
So, it would be advised to consider the One-time Settlement Facility as your last resort; when you have tried all other methods to pay your loan overdue amount. Some lenders also provide personal loans to clear your loan overdue amount but choose it according to your repayment capacity as it would be an extra loan for you to pay. Timely payments of this loan can improve your credit score.