EMI bounce can incur penalty, lower credit score; is there a grace period before it’s reported to credit bureaus?
When an EMI payment fails, for reasons such as late salary credit, an insufficient balance, or a technical glitch, borrowers may have to deal with more than just a penalty from the lender. A bounced EMI can also lower your credit score, as details of missed or delayed repayments are reported to credit bureaus.
However, the timing of such reporting and whether borrowers get a grace period to rectify the payment error depends on the applicable rules. This provision can be useful in cases where auto-debit failed due to a technical glitch from the banking portal’s end or genuine oversight.
What is an EMI bounce? Check penalty too
An EMI bounce happens when a lender’s attempt to auto-debit a borrower’s scheduled EMI from their bank account fails. While insufficient funds are a common reason, a transaction can also fail because of an expired of incorrectly linked NACH or ECS mandate, or due to a technical issue.
The borrower may face bounce charge in addition to other applicable costs when a scheduled EMI payment fails to go through, though it varies across lenders and loan type. For personal loans, these charges can typically range from ₹300 to ₹1,200 for each failed payment, while some private lenders and NBFCs may charge more or calculate the fee based on the overdue amount, according to a blog post by AU Small Finance Bank.
Do you get a grace period?
The Reserve Bank of India’s (RBI) 2023 guidelines on penal charges require banks and other lenders to communicate a grace period to the borrower, typically around seven days, before reporting a missed EMI to credit bureaus.
This gives them a short window to rectify the situation and ensure their credit score remains healthy, the blog noted. But, this heads-up is offered only if you miss your payment for one time.
Post that, late payment interest and penal charges start compounding, and the lender may start calling you more frequently to ask for payments. If you persistently miss payment deadlines, the lender may classify your account as high-risk and escalate the issue to collection agencies.
In serious cases involving large amounts of money taken as a loan, the lender also has the option to initiate legal proceedings under the Negotiable Instruments Act or pursue recovery through a Debt Recovery Tribunal.
The central bank strictly mandates that penal charges must be of reasonable amount, transparently disclosed in the loan agreement, and not used purely as a revenue-generating tool for the lender.
How an EMI bounce can lower your credit score
If your bounced EMI is reported to the credit bureaus such as CIBIL, it could potentially cause a drop of around 30 to 100 points in your credit score. However, the impact varies depending on factors such as your existing credit history, repayment behaviour and how the lender reports the delay.
Since payment history carries the highest weight roughly 35% in most credit scoring models, so even a single reported bounce leave a major mark, and the record can remain visible on your credit report for several years, the blog said, highlighting the severe consequences of payment default.
