What is Loan Overdue – Important Things to Know About It

Most people don’t hesitate to avail of a loan when they face a financial emergency. Today, there are different types of lenders in the market who provide various loans such as home loans, car loans, personal loans, etc. No matter the type of loan you avail, you are obliged to repay the same along with interest through EMIs (equated monthly instalments) until you repay the full amount.

Although you may try to repay the loan on time, sometimes, due to unforeseen circumstances like loss of job, accident, or medical emergency in the family, you may not be able to repay the loan on time. The amount that you fail to repay and is outstanding is called a loan overdue.

Let us understand how loan overdue works with an example.

Mr. Arjun Shukla availed of a personal loan, and he is obliged to pay an EMI of Rs. 9,000 every month. Now, if he doesn’t pay this amount on or before the due date, then the outstanding amount is considered a loan overdue amount.

On failure to repay the loan EMI on time, the lender can charge an overdue interest rate. So, if Mr. Shukla doesn’t make his EMI payments, then the interest will accumulate, and the overall loan overdue amount will get bigger.

The loan overdue concept remains the same for all kinds of loans. However, the penalty charges and interest may vary from one lender to another.

Now that you know what load overdue is and how it works? It would help to understand its effects on your credit score and finances.

Effects of loan overdue on your finances

• Negative impact on credit score
  

  Suppose you avail of a loan for 20 years, and you pay the EMIs on time diligently for the first five years. However, due to some financial emergencies, you are unable to pay the EMIs for the rest of the period. The lender will report every transaction to the different credit bureaus, and every late or missed payment will reflect in your credit report.

  
  

  If you miss a single EMI, then it may not affect your credit score much. However, if you miss repaying the EMI for three months or repay the amount after the due date, then your credit score will go down significantly. Any mention of a loan overdue amount in your credit report could lead to the rejection of your credit requests in the future.

• Interest penalty
  

  When you apply for any kind of loan, you must assess your financial condition and have a well-defined repayment strategy. This is vital because if you miss repaying the EMIs, then the lender will levy an interest penalty. It does not matter if you have missed a single EMI or more than one EMI, you must pay the interest penalty on the overdue amount as defined by the lender.

• Risk of losing the security
  

  If you have taken a home loan or any secured loan like a loan against property (LAP), and if you have any loan overdue, then you face the risk of losing your security. If you have a loan overdue amount for more than three months, then the lender may send you a notice to repay the overdue amount within a specific time.

  
  

  If you fail to pay the outstanding amount within the notice period, then the lender may sell/auction the asset that you have mortgaged with them as collateral to recover the outstanding due. However, before the lender sells or auctions the asset, they must give you a 30-day notice.

What to do when you have a loan overdue?

If you have paid your loan EMI and have a loan overdue, then you can get in touch with the lender and explain your financial situation. If you have a genuine issue, such as a medical emergency in the family, then the lender may offer to defer your payment and allow you to pay the outstanding amount the following month. However, you must assure the lender that you will repay both the EMIs on time.

If your financial condition is not good, and you think you may not be able to pay the EMIs on time in the subsequent months, then you can negotiate with the lender and get a permanent solution for this. You can ask the lender to restructure the payment schedule so that you get an extension in time to make timely repayments.

Another way to deal with the loan overdue is to take a loan against your personal assets, such as gold or personal insurance. Typically, a secured loan taken against collateral has a lower interest rate, and you can use the amount to settle the EMI of your more expensive loan.

If none of the alternatives work for you, then you can talk to the lender about settling the loan. This means you agree to repay a part of the loan, and the bank will consider that the loan is settled. This option will have an impact on your credit score. A ‘settled’ loan reflects negatively on the credit history/report than a loan that you repay fully.

Final Word

While you have many options at your disposal to deal with the loan overdue, it is advisable to have an emergency fund that you can use when life throws a curveball at you.