Repayment of a home loan is a long-term affair that typically lasts from 15 to 20 years. Paying your equated monthly instalments (EMIs) on time is crucial for multiple reasons.
Still, during this long tenure, some people often fail to do so due to financial problems or other difficulties. Regular defaulting on your home loan EMI can have consequences ranging from penalties to poor credit scores.
When you default on your home loan for the first time, the lender usually sends an alert through SMS, email, or even calls to remind you about the payment.
The bank may also apply a late fee or penalty charges for the delay. These penalties are usually 1 per cent to 2 per cent of the overdue amount, which is to be paid in addition to the EMI.
When you fail to pay the EMI for the second time, your bank will send you a reminder and may ask you to make the payments at the earliest.
However, if you still fail to pay the outstanding amount for the third consecutive time, the bank or financial institution classifies the loan as a non-performing asset (NPA).
Following this, the lender initiates legal action against the defaulter under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act of 2002 (SARFAESI).
The bank soon starts the process to recover the dues and serves legal notice to the borrower asking to settle the dues within 60 days.
In a home loan, which is a secured loan, the borrower pledges an asset as collateral against it. If a defaulter doesn’t pay the dues within 60 days, then as per the SARFAESI Act, the lender has the right to take possession of the collateral.
Here, the bank can possess your pledged asset even without the court’s intervention.
Once 60 days have passed, and the borrower has still not settled the dues, the lender serves a notice to the defaulter stating the value of the pledged asset and its auction date.
It must be noted that besides these consequences, defaulting on your home loan EMI also affects your credit score and, in turn, impacts your future borrowing.