When you take out a loan from a lender, you legally agree to repay the loan. However, life often surprises you every now and then and traps you in a whirlwind of uncertainties like – a job change, or a health event, which can quickly take you off the rails. These events prevent you from continuing on a fairly planned financial journey and result in missed payments on your loans or credit cards. Eventually, you can “default” on your loans or cards, and it’s important to know how those missed payments or defaults affect you.

What happens when you miss an assimilated loan monthly payment (EMI)?

Unsurprisingly, default on payment (whether it’s a loan or a card) has certain consequences. The specifics will vary depending on your situation, such as type of loan, extent of non-payment, but you can usually count on damage to your credit history and additional expenses.

• Your credit score is impacted: The first and immediate consequence is the recording of these defects on your credit report. When such defaults are reported by your lender to the credit bureau, your credit score is negatively affected. These types of entries make it difficult to obtain credit in the future as it raises a question about your creditworthiness.

• The credit profile of your guarantor / co-applicant is affected: If you have asked someone to be a guarantor or co-applicant for your credit application, their credit score will also be affected in a similar way. They will also receive calls to collect the loan.

• Chances of repossession of the assets guaranteed by the loan: In the case of secured loans such as a car, the accommodation of a default may lead the lender to initiate repossession or asset claim proceedings. Usually this happens in severe cases, but the details may vary from lender to lender.

• A greater financial burden could be caused: As much as missing a loan repayment may seem like a relief this month, but it’s an extra credit burden on you for months to come. The EMI loan as well as interest and late fees will continue to accrue on your already substantial outstanding credit.

How to avoid becoming defective?

If you find that your finances are suffering so much that your loan IMEs may not be repaid, it is best to contact your lender before the situation gets worse. Informing them in advance shows a sign of responsibility and alerts the lending institution to be ready and offer you a break if possible.

The lender may have programs regarding loan restructuring, EMI holidays, increasing tenure thus reducing EMI. This will be specific to each lender, and your payment history with the lender will also play a role.

Some employers have programs in place to help team members in financial difficulty. If you’re still in the job and you’re not sure if this is an option, contact your company’s human resources department to find out.

Budgeting for your monthly expenses and savings is the way to go to protect yourself against default. In such times, the rule of thumb to save at least ten percent of your income is the best possible use. The creation of a contingency fund is always good and advisable. These contingency funds should be able to cover fixed expenses for 6 to 7 months. One can also direct his savings to a bank account which is usually only used for paying bills and no additional expenses.

The author is Director – Sales and Marketing, CRIF India

DISCLAIMER: The opinions expressed are those of the author. Outlook Money does not necessarily subscribe to it. Outlook Money will not be responsible for any damages caused to any person / organization directly or indirectly.