Finding It Difficult To Pay EMIs? Here Are Some Ways To Avoid Loan Default

Whenever you miss or delay loan EMI repayment, not only does the lender levy late payment charges, but your credit score can also drop by a few points. Repeated non-payment would eventually leads to loan default, resulting in your credit score and future loan approval chances taking a hit. A number of individuals who face similar difficulties in repaying their EMIs are often unaware of the solutions available to bail them out. 

Here are four ways of avoiding possible loan default in case you are experiencing difficulty in repaying your EMIs: 

Switch lender for lower interest rate

For borrowers who are finding it difficult to repay existing loan EMIs, switching to another lender via balance transfer is one way of reducing their EMI burden. Before zeroing in on any lender, it’s prudent to compare them on various parameters such as interest rate, tenure, processing fee etc. Switch to the lender offering lower interest rate and better service terms. 

While opting for balance transfer, remember that the new lender would consider it as fresh loan application, and therefore may levy charges such as processing fee and administrative fee. Hence, make sure the overall saving in interest cost is substantial and the associated costs do not outweigh the benefits.

Request your lender to extend the loan tenure

Rise in expenses or dip in monthly income may strain your finances, leading to difficulty in repaying outstanding EMI. In such scenario, you can request the lender to extend the loan tenure. A higher loan tenure would bring down the EMI amount, which may make it easier for you to repay the EMI, thereby avoiding possible loan default. 

Given that extending loan tenure implies higher interest payout, try to prepay the loan whenever you have surplus funds, in order to reduce the overall interest cost.

Utilize your emergency fund for EMI repayment

Creation and maintenance of adequate emergency fund amounting to at least 6 times your monthly mandatory expenses, including loan EMIs, is pivotal to tackle financial exigencies. Unforscene circumstances such as job loss or severe illness necessitates the need for this fund. Any such unexpected financial emergency can affect your repayment capacity and may even lead to loan defaults. 

Having adequate emergency fund can also bail you out of such scenarios. Whenever you are finding it difficult to repay loan EMIs due to any financial exigency, consider utilizing your emergency fund towards repayment of EMIs to avoid attracting any late payment fees and possible damage to your credit score.

Opt for debt consolidation

Borrowers, especially those serving two or more loans, often face difficulty in repaying EMIs. The financial responsibility to repay multiple EMIs at different rates and due dates can at times burden the borrower. You can streamline this by opting for debt consolidation, wherein you would be required to repay a single EMI, at a lower rate, instead of multiple ones. 

For instance, home loan borrowers can opt for top up home loan, since its interest rates are usually lower than those of other loans such as personal loan. You can utilize top up loan to prepay other loans as well. This way, you would only be repaying home loan and top up loan rather than multiple high cost loan. 

Borrowers facing difficulty in repaying high cost loans such as personal loan or business loan can consider availing loan against property, as it usually involves lower interest rate and longer tenure of up to 15-20 years. Alternatively, loan proceeds from secured borrowing options such as loan against security, loan against FD etc. can also be utilized to prepay existing high cost loans.

Naveen Kukreja

Guest Author Naveen Kukreja is CEO and co-founder of Paisabazaar.com. He studied engineering at Delhi College of Engineering and holds a postgraduate diploma from IIM Calcutta