3 Options When You Can't Pay Your EMIs     (20-Mar-2012 )



We received a very interesting email from a reader the other day. This reader, Shravan (name changed to protect privacy), wrote in on behalf of his friend.

'My friend Shikha (name changed to protect privacy) took a loan in 2011, but got married and stopped working soon after. The bank has been unable to reach her and she has defaulted on her payments. What recourse does she have? The bank has now started harassing her.'

Consider Shikha's plight. Imagine yourself in a situation where you have taken a loan, say a home loan, and you lose your job and have difficulty getting another job at the same salary. Or for whatever reason, are unable to make the regular EMI payments. Perhaps you don't even have insurance on your home loan amount. (Use our Human Life Value calculator to see how much insurance you require)

The stressful nature of this situation can lead people to panic, or worse.

But all is not lost! It is very possible, with some discipline, to rectify the situation. PersonalFN will lay out some simple steps that you can take if you ever find yourself or a friend or loved one in this situation.

Step 1: Don't Panic

This is not a rare situation. Banks have customers who default on payments all the time.
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 and you have to bear 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.

Step 2: Get Your Papers in Order and Call Your Lender

Create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan i.e. 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, tell them that you would like to pay your loan back as soon as you can, and ask them what their options are.

You will most likely get an initial automated response that reads something like this:

"Dear customer,

We would like to work with you on the issue of your loan repayment - request you to write to us at customercare@abcdbank.com with your loan account number, contact details and the reference id ABCD00001111. A bank representative shall contact you as soon as we receive this information.

Regards, Customer Assistance, ABCD Bank"

Once you revert with the necessary details, you will get a call from your bank and can set up a meeting to calmly and rationally discuss your options.

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

Step 3: Consider Your Options, in Dialogue with Your Lender

Can the bank 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.

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.

(Read our article titled How to Get out of Too Much Debt)

Secondly, the bank doesn't want 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. Also, they lose out on the money you would have paid them. So the bank will much prefer to cut you a deal.

Here are what your options will likely be:

  1. Refinancing 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. 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)

  2. Deferring Your Payments

    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.

  3. 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 murder on your credit score. Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both.

    (Know more about your credit score with our Comprehensive Credit Report Guide)

    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 (such as Abhay Credit Counselling) 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 or planning your retirement, we would be happy to help you.

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23  Responses to
  • harish
    Updated on
    Jul 20, 2012
      thanks.... got much knowledge.....
  • Linku
    Updated on
    Aug 16, 2012
      thanks for this details :)
  • Rahul
    Updated on
    Sep 18, 2012
      Will the bank still charge us after they sell the home in auction?

    I don't have any other asset  I took the home loan and the documents of home are with bank now. In case I fail to repay and there is no source of income to me. What will be the situation?
  • M O Panikkar
    Updated on
    Mar 11, 2013
      Do the banks maintain a uniform policy of charging interest on Home loans?  I wonder.  Bank do not appear comfortable announcing their interest rate on loans.  An article on the manner / criteria followed by the bank for charging interest rate would make welcome reading.
  • Surajit Roy
    Updated on
    Mar 20, 2013
      Thanks a lot this is very good article ..
  • Pharmg568
    Updated on
    Mar 23, 2013
      Hello! interesting site! I'm really like it! Very, very  good!
  • Nk
    Updated on
    Jun 07, 2013
      Do the Fin Institutions give a 4 months loan to go with the long term deposit so that deposits can be made easily.
  • Neeraj
    Updated on
    Jun 01, 2015
      Awesome article with great details.
  • Priya
    Updated on
    Jun 24, 2015
      Hi,

    I have taken car loan , personal loan and car top up loan and the total come out 17000 and car loan EMI date is 5th of very month, personel loan EMI is on 4th of every month and car top up loan EMI is on 7th of every month.
     
    This month due to some financial crises  im not able pay on time EMI but the HDFC customer care keeps on calling and one of female customer care lady was very harsh and i said will pay you the EMI this month end and if you see my records payments are on time still they keep on calling and if im meeting in office they think that we are disconnecting  wantedly and calls to our friends number and distrubs them i guess this does not make sense.inspite i'm some how managing cash to close the EMI for this month.

    Now i feel i made a wrong decission for opting loan from HDFC bank.

    Please advise.

    regards,
    Priya
  • Nitin
    Updated on
    Jul 01, 2015
      It is the best tutorial i have ever read before...so motivated and impressive
  • tej praksh
    Updated on
    Aug 18, 2015
      awesome article.
  • philips
    Updated on
    Oct 04, 2015
     

    I have an EMI for a house that is not going to be built, the builder says there is no point to be built because the city plans have changed due to political reasons, if I will not be getting the house and the target date has been delayed by years what option do I have, can I stop making payments?

    Please let me know.

  • kusuma
    Updated on
    Dec 05, 2015
      hi
       i have emi for a personal loan total com out 4350 ....personal loan emi is on 5 th of every month ...bt my salary wil com in 10 of every month...

      this month i could not able to pay a emi for correct date what will happend ...their is any check bounce ....last month i have paid emi amount without fail ..bt this month i i hve some problem ....
  • taha
    Updated on
    Feb 18, 2016
      i have by bike emi through bajaj auto finance i pay 10200 per month, its a one year loan. i have money in my hdfc credit card. can i pay it via cc???????
  • Manideep
    Updated on
    Mar 01, 2016
      i have purchased by EMI but now i dont want that option. It has been 3 months over i want to canclle the EMI and want to pay rest of full amount. How it is Possible?
  • Raju
    Updated on
    Jul 18, 2016
      Will bank refund the EMIs given to bank if the loan is finally not settled and bank have to auction my martgage?
  • Bidyut Ghosh
    Updated on
    Aug 24, 2016
      I have taken personal loan of Rs.98000/- with repayment schedule 4478/PM for 3 years. I have paid continuously  27months. But now I am unable to pay. Please give me solution what to do.
  • Team PersonalFN
    Updated on
    Aug 26, 2016
      Bidyut,

    Greetings!

    Get in touch with your lender (bank) and try to work at an amicable solution. You may even get in touch with Credit counseling centres to help you chalk out a suitable plan.

    Regards,
    Team  PersonalFN
  • Rohit
    Updated on
    Sep 27, 2016
      Hi My name is Rohit,

    I booked flat in bangalore 14 months back and took loan from SBI and due to not having sufficient money I couldn't go for Registration and now builder is bankrupted..

    What should i do ??

    I am paying my EMI on time..

    Please reply ASAP...

    Thank you
    Rohit   
  • Vinoth
    Updated on
    Nov 26, 2016
      Hi,

    I have availed personal loan from HDFC bank, for a tenure of 3 years, almost i have paid emi till September 2016. recently my  DAD passed away and lost job as i need to take care of my mom as she is alone i failed to pay EMIs for two months. im in a huge financial crises where im not able to pay the EMIs at current situation and asked a month of time with bank people.

    But they are very rude n trying to threaten me by calling to my friends and disturbing then.

    people like me back to back situation like this is a big time hit, need some time to recover from this situation..

    kindly advice....

     
  • venkat
    Updated on
    Dec 06, 2016
      Hi I am Venkat , i found this article little late than.. anyhow i would like to narrate this for you to under my issues & kindly spare some time to revert on my issue at your earliest Pls. I have got a PL from Axis & HDFC on August 2014 & a car loan on the same month. Total EMI is 33K/pm. My total salary is 34K only & i failed to calculate my salary & failed in planning my income after that. So soon after an year i made use of all my Credit cards & Pledged my jewels to take care of my family expenses. By 2016 March i failed to pay my EMIs & CC dues. Till date i have 5 months of outstanding dues on my loans & CC. Now i feel that i have been pushed to the corner of my life where if i dint pay the sum of 10L for my jewels , that will be auctioned. These jewels are hereditary & i am not in a position to 
    I have got PL from Axis & HDFC on 2014 August & Car loan from Kotak in the same month. Total EMI come out is 33K. My salary is 34K only. I failed to calculate my salary & i dint plan effectively ,so ever since the time i started the loans , my salary is only sufficient to manage my dues & i am not able to take care of my personal or my family expenses. so i started depending on my credit card & jewels.
    I dint miss any of my dues till March 2016 , but after that slowly all my jewels & credit card is exhausted. Hence i am not able to pay my loans as well after that. i became a defaulter in my Loans as well as my Credit cards (5 months till date) Now am in a very tough situation where i have to pay the debts asap.
    I have got PL from Axis & HDFC on 2014 August & Car loan from Kotak in the same month. Total EMI come out is 33K. My salary is 34K only. I failed to calculate my salary & i dint plan effectively ,so ever since the time i started the loans , my salary is only sufficient to manage my dues & i am not able to take care of my personal or my family expenses. so i started depending on my credit card & jewel
    I have got PL from Axis & HDFC on 2014 August & Car loan from Kotak in the same month. Total EMI come out is 33K. My salary is 34K only. I failed to calculate my salary & i dint plan effectively ,so ever since the time i started the loans , my salary is only sufficient to manage my dues & i am not able to take care of my personal or my family expenses. so i started depending on my credit card & jewels.
    I dint miss any of my dues till March 2016 , but after that slowly all my jewels & credit card is exhausted. Hence i am not able to pay my loans as well after that. i became a defaulter in my Loans as well as my Credit cards (5 months till date) Now am in a very tough situation where i have to pay the debts asap.
    recover the same. Apart from salary , i am also working as a freelancing consultant to cater my money issues , where i am not able to manage the money issues.Though if banks give some time , i will be failing in my jewels part. And i am ready to repay the loans along with the interest if i could get some time & money now to cater my jewels part alone , where in that also i have time till 12th Dec 2016 only. Please advise...

    Though if banks give some time , i will be failing in my jewels part. And i am ready to repay the loans along with the interest if i could get some time & money now to cater my jewels part alone , where in that also i have time till 12th Dec 2016 only.

  • SLT
    Updated on
    Jan 03, 2017
      Thank you for the article. I feel bit ok now. Thanks again
  • rock
    Updated on
    Jan 12, 2017
      thanks

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