Impact of EMI default on CIBIL score and how does that affect eligibility for a new loan?

  

Most people depend on loans to realize their financial dreams. One of the criteria for the eligibility for a personal loan is an ideal CIBIL score. A person’s lending records are maintained by credit reporting agencies, especially CIBIL, which is an acronym for Credit Information Bureau of India Limited. A CIBIL score is a three-digit number derived using an individual’s credit payment history from banks and other financial institutions.

Being a major factor in assessing a person’s credit worthiness, a CIBIL score is provided in a CIBIL report, which is a consolidation of details such as personal, credit summary, loan account, employment and contact in one report. A CIBIL score ranges somewhere between 300 and 900. If you have a higher score, you have a better chance of your loan application getting approved. When you apply for a loan, the CIBIL score is one of the most important aspects that can affect your loan approval. Any score below 750 has a difficulty in getting your loan sanctioned.

A person’s CIBIL score is determined by the payment history, multiple loan enquiries, credit mix and high credit utilization.

What Would Happen If You Default on Paying EMI?

If you delay your EMI payment, it will decrease your credit score, which will have an impact on your credit worthiness. Missed or delayed payments are categorized into minor and major defaults. Those delayed or missed EMI payments, which are less than 90 days old, are considered minor defaults. In case you fail to pay EMI beyond 90 days, then your account is listed under NPA or nonperforming assets and considered as major defaults. Among various factors that affect EMI default are: 

  • CIBIL Score

When it comes to determining your eligibility for a home loan, your CIBIL score is one among the several factors considered. It is generated depending on your past credit behaviour recorded on the credit report. Your past credit behaviour includes:

o  Your complete repayment history i.e., successful repayment of loans

o  Utilization of your credit balance – this shows the total credit available and the percentage of credit used

o  Loan repayment tenure and timely repayment

o  New loan enquiries – your CIBIL score affects when you make a new loan enquiry

o  Your credit mix, which asks for a healthy mix of unsecured and secured loans

The lender or bank reports any non-payment or over-due of an EMI to CIBIL. The impact of EMI default on CIBIL scores leads to either a major or minor drop. If it reduces your credit score significantly, then it affects your loan eligibility.

  • Decreases Your Borrowing Capacity

When you apply for any home loan the next time, the bank will check your CIBIL score and credit report, and if you have a low score, you fail to meet one of the most required eligibility criteria to have your loan application approved. A CIBIL score effect on home loan may force the bank to decide whether to lend money to you or not. If you have any late EMI payments owing to some exceptions given by your previous lender, your CIBIL score will still get affected. This will decrease your borrowing capacity as you will find it difficult to convince the new bank or lender about the reasons for late payments.

  • Potential Legal Implications

Legal implications like a civil suit is rare in the case of personal loans. A bank opts for it only if it has made multiple attempts and failed to recover the money from the borrower.

You should take the effects of EMI default on CIBIL score such as a reduced score and decreased creditworthiness as a lesson and avoid defaulting on EMIs. If you have delayed any EMI, the report of it is sent to the credit bureau, which has an effect on your credit rating. To improve your credit score, pay your EMIs on time and in full and keep a track of your credit report.