Picture this: A young man, Abhinav, takes a personal loan for his wedding. A little later, he takes another loan to renovate his home. He regularly pays the EMIs for both loans when he is suddenly laid off. Now, Abhinav is worried about making his loan repayments on time. Like Abhinav, many of us feel anxious about not paying EMIs on time and subsequent personal loan foreclosure and its impact on our credit history if our regular source of income is suddenly suspended.
When a borrower defaults in paying EMIs on time, the lender issues repeated reminders to ensure that the borrower makes the payment(s) due. If the borrower fails to make these payments despite multiple reminders, the lender is forced to auction the collateral, if any, and use the proceeds to settle the borrower’s account. This is known as personal loan foreclosure. The lender takes this route as a last resort. Small defaults or defaults by individuals who have been regular in the past are generally adjusted by the lender.
How is credit history calculated?
Before understanding the impact of foreclosure on the borrower’s credit history, let’s understand the term. Different factors like repayment history, current outstanding loans, nature of loans taken, collateral provided, and so on determine credit history. For example, an individual borrowing within the limits of his financial capability and regularly paying EMIs before the due date will have a good credit score. Similarly, frequently taking personal loans for unplanned or emergency expenses may lower an individual’s credit score. Procuring personal loans is convenient in our times. Along with the lenders, many credit apps offer funds with a single click.
Impact of foreclosure on the credit score
Once in a while, a small default does not lead to foreclosure. For example, if you make a late payment (say, by 4-5 days) in a particular month due to a medical emergency in the family, it will not lower your credit score. Usually, lenders allow a certain grace period after the EMI due date till which one can pay. A credit score takes a hit when there are consistent defaults in EMI payments and a failure to reply to the lender’s emails and messages. A foreclosure can lower one’s credit score drastically even if it was good over the past few years, and this impacts personal loan eligibility.
In Abhinav’s case, his credit score may fall significantly in the event of foreclosure. This, in turn, may impact his borrowing and negotiating capability. In the future, if he wishes to borrow a home loan, vehicle loan, or take another personal loan, lenders would first see his credit score. Though some lenders may refuse credit initially, others may be willing to lend. The new loan may carry a slightly higher interest rate and require collateral having a higher value. Even though your credit score may be low, you can do basic research using a personal loan EMI calculator. It calculates your eligibility depending on your financial status, tenure of the loan, and individual loan interest rates.
Remember that a foreclosure impacts the credit score temporarily. Just as change is inevitable, your credit history, too, can be restored to its previous glory if you consistently pay your EMIs on time. Once this is done, you can avail of home loans, vehicle loans, or personal loans at the most competitive terms.