When we need money to cover a variety of necessities and unexpected expenses. Lenders offer a variety of loans, including personal loans, home loans, auto loans, gold loans, and others. Equated Monthly Installments (EMIs) are the method through which borrowers repay their loans and the lender’s interest. However, there are situations when clients experience financial hardship and cannot make loan payments on time owing to unforeseen circumstances. Read this article to learn more about loan overdue, its case study, effects, and steps to clear it.
What is Loan Overdue?
The loan balance clients don’t pay back on time is the loan overdue amount. The Loan Overdue Amount is the sum that has not been paid even after the payment due date, as the name suggests. Additionally, it refers to any loan or lease agreement made available by the borrower in which the party responsible for making payments has not done so within 90 days of the due date.
Case Study on Loan Overdue
Let’s imagine a customer has an EMI for a personal loan due on a certain date and is for GH₵9,000. They will consider this sum the loan overdue amount if he doesn’t pay this EMI by the deadline. The lender will begin charging a late interest charge on this past-due loan. Therefore, the Loan Overdue Amount may increase due to numerous penalties and additional interest on late payments if a person consistently misses his or her EMI payments over an extended period of time. In the case of a personal loan, banks normally impose an additional interest rate (Penal Interest Rate) of 2% per month.
Since all loans, secured and unsecured, must be repaid on time, the notion of Loan Overdue applies to all of them. However, lenders may have differences in interest rates and penalty fees. Knowing what loan late is, you probably want to know how it affects a person’s financial situation.
What are the Effects of Loan Overdue on Your Credit Report and Other Finances?
Always make your loan EMI payments on time. Your financial situation can suffer if you even miss one EMI. There are many effects on you when you owe money on a loan. To help you understand better, we highlight a few more significant ones. They include:
1. Penal Interest Rate
Before applying for a loan, a consumer should always make sure they have a clear repayment plan. The explanation is that your credit score is impacted by the loan overdue amount, as we previously stated. But that’s not all the lender may also impose penalties if the loan EMIs are late.
I’m sure you’re wondering, how? As you are aware, you must make a fixed EMI payment each month. Therefore, you will be required to pay a late payment penalty in the form of Penal Interest as determined by the lender for each EMI you miss. Depending on the type of loan, this additional penal interest rate may differ from one lender to another.
The penal interest rate is a type of fine imposed by the lender when a borrower cannot make timely EMI payments. No matter how many EMIs you skipped, you will still pay the penalty interest. They charge the loan overdue amount of this penal interest monthly. For instance, the borrower must pay a penalty of 2% on the loan overdue amount for each month of default if the lender levies a penal interest rate of 24% annually.
2. Loss of Security
The loss of your security may also occur if you have taken out a home loan. Or any other secured loan, such as a gold loan, a loan against property. Or a loan against securities (shares, mutual funds, bonds, etc.). Let’s make this easier to understand.
If a secured loan’s overdue balance has accumulated for the last three months, or if the borrower has missed 90 days’ worth of EMI payments, we might classify the loan as a non-performing asset (NPA). In such cases, lenders typically send reminders and 60-day warnings about the Loan Overdue Amount. The lender is free to sell the items you pledged as collateral if a borrower doesn’t pay the loan overdue amount within the notification period. However, there is one crucial point to note: Lenders still need to give a second 30-day notice before the auction.
This notice will include all pertinent information about the auction, such as the asset’s current value (as determined by the lenders’ valuer). Plus the auction date and time, etc. If the borrower believes they undervalued the asset, he or she may contest the auction. After collecting the loan overdue amount, lenders must also return any excess funds (if any) to their clients.
3. Impact on Credit Report
Consider taking out a 20-year home loan and making on-time EMI payments. The first time in your tenure, however, you cannot make your EMI payment on time after two years because of financial strain. They report each transaction you have with the lender to different credit bureaus, and any missed payments will show up on your credit report. Your credit report is not significantly impacted by one late payment. However, if you haven’t paid your EMIs for the past three months, it will be recorded as a non-performing asset (NPA) and will appear as a default on your credit report, which will ultimately have a negative effect on your credit score..
Mention of Loan Overdue because you missed repayments could lead to rejection of your credit applications in the future. This is because lenders always check your credit report to know your past repayment behavior. Even before they give you a loan or issue you a credit card. Therefore, it would be wise to make your loan payments on schedule consistently. You must determine the loan amount based on your need and ability to repay.
Steps to clear Overdue Loan
A person can start acting even before he is, in fact, in default on any payments. He may still have several options to lessen or eliminate the burden of overdue payments, such as:
Step 1: Communicate with lenders
Talking to the lender in advance about any possible payment concerns is best. By changing the payment deadline or enabling the borrower to postpone payments temporarily, they might be able to help the borrower. They can sometimes negotiate an agreement. Make a concession, let them know you can’t pay, and then watch to see whether they accept. It is possible, but it won’t work unless the borrower can convince the lender that they won’t be able to make payments. Although the borrower will lose credit if he settles, at least the payments will have been made.
Step 2: Consolidate or refinance
If you consolidate the loan with a personal loan, it will result in lower interest rates and a smaller monthly payment. Additionally, you will have extra time to repay a new loan. You might obtain a personal loan, for instance, and repay it over three to five years. It could result in you paying more interest if you wait longer to repay, but it also could not. Also, you might easily come out ahead, particularly when repaying payday loans.
To be eligible for a new loan, apply before you fall behind on payments. Lenders might not want to approve a consolidation loan if you are already behind. Where may one get loans? The first step is to apply for an unsecured loan with local banks, credit unions, and online lenders.
Step 3: Personal loans
Using a personal loan to consolidate helps improve loan approval. If a borrower uses his house as collateral, he risks losing it in a foreclosure, which would be challenging for him and his family. Unable access to a personal automobile may make commuting to work and earn a living challenging.
Step 4: Prioritize Payments
Making difficult decisions about which loans to maintain current on and which to discontinue making payments on may be necessary. According to conventional opinion, you should continue paying your home and automobile loans but cease paying your unsecured debts (such credit cards and personal loans) if you find yourself in a tight spot. The justification is that nobody really wants to be kicked out of their home or have their car repossessed. Credit damage is likewise a concern, although it does not have the same immediate effects on a person’s life. Make a list of the expenses and decide carefully on each one. To ensure proper payment prioritizing, give safety and health top priority.
Step 5: Pay late
Although it’s ideal to pay off loans on time. But if you cannot do so, being a little late is preferable to being completely late. The optimal course of action is to make your payment within 30 days of the due date. The credit will not be harmed because late payments are frequently not even recorded to credit bureaus. This gives you the choice to consolidate or refinance their debt.
Read also: Loan Delinquency – What you should know
How do I calculate the interest on a loan overdue?
If you want to calculate a loan overdue, just multiply the amount of the debt by the number of days for which the payment is late, multiplied by the daily late payment interest rate. These interests will definitely be in operation on the date the payment becomes overdue.
Many people take out loans at different points in their lives to cover various financial needs. There might be unpaid balances on these loans if they encounter a financial crisis. The accumulation of credit card debt and skipping EMI payments on current loans would increase financial liabilities exponentially. When the interest on many debts adds up to an unmanageable amount, it’s time to choose a personal loan for debt consolidation.