How Late Personal Loan Payments Impact Your CIBIL Score

Your CIBIL score is a crucial factor that determines your creditworthiness in the eyes of lenders. Late personal loan payments can significantly impact this score, affecting your ability to secure credit in the future. As an urban or semi-urban Indian, understanding the consequences of missed loan payments is essential for maintaining a healthy credit profile. In this article, we’ll explore how late personal loan payments affect your CIBIL score, the classification of defaults, and the long-term implications. We’ll also provide practical tips to help you manage your loan payments effectively.

Understanding the Impact of Late Payments

Late payments on personal loans can have a profound effect on your CIBIL score. Here’s how:

Immediate effects

• A single missed or late payment can lower your CIBIL score, decreasing your creditworthiness.

• Payment history accounts for around 35% of your credit score, making it a critical factor.

• The impact on your score can be more severe if the payment is delayed for an extended period.

For example, if you have a personal loan EMI of ₹10,000 due on the 5th of every month and you miss the payment by 30 days, your CIBIL score may drop by 50-100 points, depending on your credit profile.

Classification of defaults

Late payments are categorized into minor and major defaults:

• Minor default: If a payment is missed or delayed for less than 90 days, it is considered a minor default. While this temporarily affects your CIBIL score, it is less severe compared to major defaults.

• Major default: If the payment is delayed beyond 90 days, it is classified as a major default. This has a more significant and long-lasting negative impact on your CIBIL score, and your account may be categorized as a non-performing asset (NPA).

Long-term consequences

• Missed payments can stay on your credit report for up to 7 years, affecting your creditworthiness during this period.

• Even if you make up for the missed payments, the record of the late payment will remain on your credit report.

Imagine you missed 3 EMIs on your personal loan in 2022. Even if you pay off the loan entirely by 2024, the late payments will still be reflected in your credit report until 2029, impacting your ability to secure credit during this time.

Financial Implications of Late Payments

Late payments on personal loans can have several financial implications:

1. Late payment fees and interest charges

• Late payments can result in late payment fees and additional interest charges, increasing the overall cost of borrowing.

• These fees and charges add to the outstanding loan amount, making it more difficult to repay the loan.

For instance, if your personal loan EMI is ₹15,000 and you miss a payment by 45 days, you may incur a late payment fee of ₹750 (assuming a 5% late payment fee) and additional interest charges of ₹1,500 (assuming an interest rate of 15% per annum).

2. Difficulty in obtaining credit

• A history of late payments can make it challenging to obtain credit in the future.

• Lenders may be less willing to extend credit or may offer credit at higher interest rates due to the perceived risk.

3. Reduced credit limits

• Credit card companies may reduce your credit limit if your CIBIL score is low due to late payments on your personal loan.

• This can further limit your financial flexibility and ability to manage expenses.

Impact on Creditworthiness and Loan Eligibility

Late personal loan payments can significantly affect your creditworthiness and loan eligibility:

Loan and credit card rejections

• A low CIBIL score due to late payments can lead to loan or credit card application rejections.

• Lenders may perceive you as a high-risk borrower and be hesitant to extend credit.

Future borrowing costs

• Potential lenders evaluate your previous financial behavior to forecast your future behavior.

• A history of late payments may indicate to lenders that you are not reliable in making consistent and timely payments.

• As a result, you may face higher interest rates on future loans, increasing your borrowing costs.

For example, if you apply for a home loan with a CIBIL score of 750, you may be offered an interest rate of 7.5%. However, if your score drops to 650 due to late personal loan payments, the interest rate may increase to 8.5%, resulting in higher EMIs and total interest paid over the loan tenure.

Managing Your Personal Loan Payments Effectively

To avoid the negative consequences of late personal loan payments, consider the following tips:

1. Set up automatic payments

• Automate your EMI payments by setting up a standing instruction with your bank.

• This ensures timely payments and helps you avoid missed due dates.

2. Maintain a budget

• Create a monthly budget that accounts for your personal loan EMI and other financial obligations.

• Regularly track your expenses and ensure you have sufficient funds to cover your EMIs.

3. Communicate with your lender

• If you anticipate difficulty in making a payment, proactively reach out to your lender.

• Discuss alternative payment arrangements or loan restructuring options to avoid defaults.

4. Prioritize debt repayment

• If you have multiple debts, prioritize repaying your personal loan to minimize the impact on your CIBIL score.

• Consider debt consolidation or balance transfer options to manage your debt more effectively.

Airtel Finance offers competitive personal loans with flexible repayment options. You can easily check your eligibility, view interest rates, and apply for a personal loan through the Airtel Thanks app. By maintaining a good credit score and making timely payments, you can unlock attractive offers and benefits from Airtel Finance.

Conclusion

Late personal loan payments can have a significant impact on your CIBIL score and creditworthiness. Understanding the consequences of minor and major defaults, as well as the long-term implications, is crucial for maintaining a healthy credit profile. By setting up automatic payments, maintaining a budget, communicating with your lender, and prioritizing debt repayment, you can effectively manage your loan payments and avoid the negative impact on your credit score.

Airtel Finance offers a range of financial products, including personal loans, to help you meet your financial goals. Check your credit score for free and explore personal loan options tailored to your needs. By staying informed and proactive, you can build a strong credit profile and secure a better financial future.

FAQs:

1. How long do late payments stay on my credit report?
Late payments can stay on your credit report for up to 7 years from the date of the missed payment, affecting your creditworthiness during this period.

2. Can I still get a loan with a low CIBIL score due to late payments?
While it may be more challenging to secure a loan with a low CIBIL score, some lenders may offer loans at higher interest rates to compensate for the perceived risk.

3. How can I improve my CIBIL score after making late payments?
To improve your CIBIL score, make sure to make all future payments on time, reduce your credit utilization, and avoid applying for new credit frequently.

4. What should I do if I can’t afford my personal loan EMI?
If you are facing financial difficulties, contact your lender proactively to discuss alternative payment arrangements or loan restructuring options to avoid defaults.

5. How can I check my CIBIL score for free?
You can check your CIBIL score for free on the Airtel Finance website or through the Airtel Thanks app, which provides regular updates on your credit profile.