Seven ways to avoid a payment default without affecting your credit score
Defaulting on a loan doesn’t age well for your overall financial health. A missing payment can negatively affect your credit score, thereby reducing your creditworthiness as a whole. However, some things go beyond our control, especially surviving job losses and medical emergencies in the covid-19 era. However, there are ways you can avoid a payment default without affecting your credit score.
Seven ways to avoid a payment default
Contact your lender
When you release that you are not financially sound for your monthly payment, you should first contact your lender. Under the right circumstances and reason, your lender may go lenient and suggest some crucial steps to extend your payment date. However, make sure to time the payment within reason, or it may raise suspicion about your repayment intention.
Loan restructuring
Restructuring a loan means extending your tenor amount by lowering your EMI amount. If paying a hefty EMI will be hard, you can apply for a loan restructuring scheme to your lender. This helps in managing your finances better and lets you pay your loan EMI without any default. However, don’t do that for a temporary financial crisis. For instance, if you think your finance will get back on track within a couple of months, there is no logic. That’s because an increased tenor means you have to pay more interest. Instead, you can ask your financial advisor to help you with a loan rescheduling process.
Loan Rescheduling
It refers to the process where the lender extends your loan or adds extra time to your existing tenure. You can revise your monthly installment and pay less EMI. Hence, borrowers can buy some spare time at hand to repay without default or paying a high-interest rate.
Deferment
It is highly recommended if you are expecting to receive a lump sum amount in the future. For example, you are receiving a yearly bonus. If you are receiving a lump sum payment after three months, you can request your lender to defer the principal amount for three months. However, you still have to pay the EMI’s interest. You can repay the principal once you receive your money after three months.
EMI holiday
Generally, an EMI holiday refers to when you will get some relief from paying loan EMIs. While you may find the EMI holiday concept similar to deferring payment, in this option, you can avoid paying EMI for a few months after receiving the loan amount.
Meaning, you don’t have to start repaying your loan from the next month of your loan disbursal. Instead, you will get up to 6 months of break from paying loan EMIs. However, not everyone can avail of this option. Its availability depends upon several parameters such as credit score, repayment history, etc.
Collateral
This option is suitable for an instant personal loan where you haven’t pledged any asset as collateral. If you feel defaulting on the payment is the only option left, you can use collateral as a backup. It will also reduce the penalty charges.
Switch
The above mentioned options serve as a temporary solution. For permanent results, you can transfer your loan rescheduling advisor for loan switching options. Switch here refers to transferring your loan portfolio to a lender offering a lower interest rate. It may sound lucrative, but remember, you have to pay a prepayment penalty to your existing lender and a processing fee to your new lender.
Conclusion
Rescheduling is a less expensive method to avoid a default payment. The process is faster and does little to no damage to your credit score.
For a permanent solution, you can opt for loan restructuring or loan switching options. They are a little bit complicated, and without proper knowledge of the topic, you may get tangled in a messy financial system. However, you don’t have to do much of the paperwork with a reliable loan rescheduling service. Some professionals can analyze your current financial health and help you make a sound decision.
FAQs
Is loan rescheduling bad for your credit score?
Loan rescheduling doesn’t affect your credit score or worthiness significantly since you repay it within a couple of months.
Does Loan Restructuring affect your creditworthiness?
Lenders must report to the credit bureau whenever they approve a loan restructuring scheme for anyone. Your credit report will reflect the term ‘Restructured loan.’
If restructuring a loan results in a massive increase in your overall debt, then this might impact your credit score in the long run.
However, this won’t highly affect your credibility if you have a good record in the past. Besides, if you pay the loan amount regularly at the right time, the drop in score will get rectified within no time.
