4 Things To Do When You Are Not Able To Pay EMI    Feb 20, 2018


“I am unable to pay my monthly EMI and I need help”.


We received a mail from Akash (name changed to protect privacy) with this written on the subject line.

We further contacted him and understood his situation. Here it is for you…

Akash, works with an IT conglomerate as a consultant and his career spans a decade. Two years ago, when he had accumulated enough savings for down payment he decided to fulfil his dream of buying house with the help of home loan. Today he lives there with his parents and wife.

Due to down turn in the IT sector, many companies were laying-off engineers over the last few months. And Akash lost his job 9 months ago. Along with the trauma of loss of job what Akash is worried about meeting the debt obligation.

Akash’s experience of dealing with debt had been very short in the past. 3 years he had serviced the personal loan for wedding on timely basis. The cash outlays were planned well, and everything was sorted. This time too he assumed that he would be able to service the home loan. But unfortunately, luck isn’t in his favour. He is finding it difficult to get another job at the same salary. And is unable to make the regular EMI payments.

Sadly, he does not even have an insurance on home loan amount.

Consider Akash's plight. Such stressful nature of this situation can lead people to panic, or worse. 

Have you ever been in such a situation? Or are you going through it and embossed to even face it.

Then be assured that all is not lost! It is possible to grow out of such a crisis.

PersonalFN has laid out some simple steps that you can take if you ever find yourself in this situation.;

1. Don't Panic

Do not be harsh on yourself and do not react in an extreme fashion. Remember this is not a rare situation. Banks have customers who default on payments all the time. We understand it is a tough time for you but stay calm and find a practical solution.

It might feel like you are alone, but you aren't. There's no need to feel like you have a great weight on your shoulders that you have to carry it by yourself. In fact, your bank will be the first entity willing to help you. Defaulting on your loan, even if it is a home loan, is not the end of the road.

2. Contact Your Lender and keep your documents ready

Next step is to face the situation and contact your lender. Approach them and explain your current situation before matters get worse. Do not be scared and take charge of the situation .

Call the lender and set up a meeting to calmly and rationally discuss your options. 

And before you approach them create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan such as date of taking the loan, tenure, interest rate, EMI amount and so forth. Have this handy when you talk to your lender.

Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, state your intention to pay your loan back as soon as you can, and ask them what their options are.  

Like Akash, if you have clean past loan records which you cleared on time carry them along. This in a way will help you gain their trust about your intention to pay the loan.

(Read our article titled 8 Things You Should Know about Home Loans

3. Consider Your Options and Initiate A Dialogue with Your Lender

If you have paid your EMIs on time until now, the bank knows you as a genuine borrower, and will take this into consideration when working together with you to find a mutually feasible solution.

'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution. 

Genuine reasons that banks understand are loss of a job, illness, or an accident that may render you unable to work. You might also have multiple loans and find yourself in too much debt to handle.

Secondly, the bank is not keen to repossess your assets, it wants you to pay the money owed, or at least most or part of it. If you default, the bank's NPA ratio (Non Performing Assets) goes up. This reflects badly on the bank’s balance sheet. Also, they lose out on the money you would have paid them. So, the bank will much prefer to cut you a deal.

Wondering if the bank can repossess your asset i.e. your car or your home?

Legally, yes, they can. But there are a couple of reasons why you don't have to necessarily worry about this. 

Firstly, the repossession procedure in India (and in fact elsewhere in the world as well) is very lengthy and there are steps along the way where you and the bank can work together to come to a satisfactory deal. 

Here are likely options for you to settle your loan:

  1. Refinance your loan

    If your problem is one where the EMI is too high, due to either an increase in overall interest rates, or an increase in your personal commitments to yourself, your loved ones, or any other matter personal to you that reduces your bank balance, or a combination of these factors and others, then what the bank will do is restructure your loan. 

    If you are currently paying Rs. 10,000 per month for N years, and this is too high, the bank might offer you an EMI less than Rs. 10,000 per month, for a little more than N years. So, your EMI goes down, giving you some breathing room and the bank doesn't lose money because it will simply make it up from you over a longer period of time. Everybody wins on some level. 

    Keep in mind that the payments you now make will eventually cost you more in terms of total money repaid, but if breathing room is what you need, this will provide it. However, the extension in tenure will be small, so the change in your EMIs will also be small.

    (Use PersonalFN’s EMI Calculator to get a clear picture on your EMI outlays)

    Also, as a next step, the bank can opt for foreclosure by selling off the collaterals stated when you applied for the loan, by auction, with your co-operation. 

    Refinancing can be done for many situations. 

    It is also the go-to option for people who find that their bank is not reducing floating interest rates in line with other banks. You can approach your bank to reduce rates, or you will shift to a more amenable lender. For credit card debt, you can also opt for balance transfer by shifting your existing debt onto a new card with a 0% interest rate for 6 months and paying off as much as you can within these 6 months. 

    (Read our article titled Want to Switch Your Home Loan? Read This First
     

  1. Grace Period

    May be the problem is not that you can't pay enough, it is that you can't pay at all. If you are in a position where you feel that within a few months your financial situation will change, you will get a job and be able to start repaying your loan a little bit at a time, perhaps at a lower EMI, then you can approach your bank for deferral of your payments.

    The bank will grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows. 

    Once the window closes, your EMIs will restart (on either the same terms or your new negotiated terms), but will include late payment penalties, known as Delayed Payment Charges. These charges are applicable for payments made after their due date.

    In case some of your post-dated cheques (PDCs) have bounced due to insufficient funds, you will also be subject to cheque bounce charges.
     

  2. Lump Sum Settlements

    This is something that for obvious reasons might not be feasible for a home loan, but it can work for a personal loan, credit card debt, or a car loan.

    On a case to case basis, banks are sometimes willing to go for one time or lump sum settlements of outstanding dues. They will waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this is detrimental on your credit score.

    Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both. 

    (If you are clueless about credit reports, here isAll You Need To Know about credit report

4. Liquidate your investments

Liquidation of assets can be your last resort. If none of the above options work then you can liquidate your investments to service your debt. You can liquidate your deposits or mutual funds to pay EMIs. On the other hand, you can also use this amount to make part payments of your principal amount.

What happens if you still can't pay? 

At this stage, your bank will seek repossession of the asset. The asset will be auctioned off within 15 days (for a movable asset like a car) or 30 days (for an immovable asset such as a home). During this period, you still have the option of buying back your own property provided the funds are available to you. 

At no time during the process will the bank not give you the option to pay, in bits and pieces or via a reduced lump sum and maintain possession of your asset. 

Conclusion

Obviously, the best solution would be to not get into this situation in the first place. But once you are in it, remember that panicking will get you nowhere and your time would be better spent in dialogue with your bank, coming up with a feasible solution together. You can also contact credit counseling centers for guidance. 

One of the main tenets of financial planning is safety. This is done by way of a contingency fund. Remember, if you have EMIs, to include them in your contingency fund and have at least 6 months to 2 years of expenses set aside in a safe liquid fund, for use in case of emergency situations. 

Also, if you wish to build up a strong mutual fund portfolio to meet your life goals including purchase of a home, child’s future planning or planning your retirement, we would be happy to help you.  



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