Why Timely EMI Payments Matter: Understanding Their Impact on Your Financial Health
Whether it's a personal loan, car loan, business loan, or home loan, the Equated Monthly Instalment (EMI) is a widely used method of loan repayment. Loan repayments are done through Equated Monthly Installments (EMI) to make budgeting easier. The EMI amount covers both principal and interest, with interest being calculated on the outstanding amount, which keeps reducing over time with each payment. They help manage large purchases and offer longer repayment terms, easing cash flow management for the borrower. The EMI is calculated based on the loan size, interest rate, and tenure. Larger loans, higher interest rates and shorter tenures lead to higher EMIs. The creditworthiness of the borrower also affects EMIs. Better credit scores and stable income result in lower interest rates and EMIs.
While most borrowers strive to meet their repayment obligations punctually, occasional oversights do occur. In this article, let's understand the benefits of timely repayments.
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What are the benefits of making timely EMI payments?
1) Improved credit history:
Making your EMI payments on time improves your credit history and thereby increases your credit score.
2) Better options:
Enhancing your credit score boosts your creditworthiness, opening doors to more affordable credit options. This enables you to potentially swap out your current loan for one with a reduced interest rate.
3) Avoid penalties & charges:
You don’t have to pay late payment penalties or charges if you don’t miss out on any of your EMIs.
4) Closer to actual ownership of asset:
When you buy a home or a car using a loan, you can remove the hypothecation from the car or the home only after the loan is repaid.
What are the consequences of missing EMI payments?
1) Penalties & Charges:
The most immediate effect of missing an EMI payment is that you have to pay a late payment penalty or charge. These fees vary from lender to lender and are charged as per the terms of your loan agreement.
2) Bad impact on Credit Score:
Missing your EMIs can negatively impact your credit history and creditworthiness. Missing of EMI is reported by the lenders to credit bureau agencies. The three-digit credit score is reduced.
3) Legal Troubles:
In case of repeated defaults, lenders may explore to legal options to recover the outstanding amount and also appeal to courts to obtain judgement against you.
4) Future Borrowing:
The impact on your credit history and diminishing creditworthiness makes it more difficult for you to obtain credit in the future and could also increase your cost of borrowing in future.
5) Collateral:
If you have availed a secured loan like an auto loan or a home loan, the lender may proceed to sell the pledged collateral to recover the loan amount.
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Ensuring ethical and fiscal responsibility involves honoring your debts promptly. If you frequently encounter difficulty in meeting EMIs punctually, try to maintain a reserve equivalent to at least 1-2 EMI payments. Keep a closer watch on your expenditures and devise a financial strategy to fulfil your commitments and aspirations. If necessary, curb extravagant spending on items like lavish dinners, pricey gifts, or non-essential luxuries such as expensive watches. Opting for autopay rather than manual loan repayments can be advantageous for those prone to forgetting payment deadlines. Lastly, consolidating debt for easier management rather than juggling multiple loans simultaneously can prove beneficial.
