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When you take a loan from a lender, you make a legal commitment to repay the loan. However, life often surprises you from time to time and traps you in a whirlwind of uncertainties like - a job change, or a health event, which can quickly throw you off track. These events limit you from going on with a fairly planned financial journey and lead to missed payments on your loans or credit cards. Eventually, you may "default" on your loans or cards, and it is important to know how such missed payments or defaults affect you.

What happens when you miss a loan equated monthly installment (EMI)?

Not surprisingly, defaulting on a payment (be it a loan or card) leads to certain consequences. The specifics vary, depending on your situation, such as the type of loan, the extent of non-payment, but you can usually count on damage to your credit history and additional expenses.

• Your Credit Score is impacted: The first and immediate consequence is the entry of such defaults to your credit report. When such defaults are reported by your lender to the credit bureau, your credit score gets negatively impacted. These kinds of entries make it difficult for you to get credit in the future as it raises a question on your creditworthiness.

• Your guarantor' / co-applicant' credit profile is impacted: If you have asked someone to be a guarantor or co-applicant on your credit application, then their credit score will also face a similar impact. They will also receive calls to recover the loan.

• Chances of repossession of assets secured against the loan: In the case of secured loans like a car, housing a loan default may lead to the lender initiating the procedure for the asset repossession or claim. Generally, this happens in severe cases, but specifics can vary from lender to lender.

• A larger financial burden might be caused: As much as missing a loan repayment might seem like a relief that month, but it is an addition of credit burden on you for the upcoming months. The loan EMI along with the interest and late fee will keep piling onto your already substantial outstanding credit.

How to avoid becoming a defaulter?

If you see that your finances are taking a hit, so much so that your loan EMIs might be at the risk of going unpaid, it is best to get in touch with your lender before the situation worsens. Informing them in advance shows a sign of responsibility and alerts the lending institution to be prepared and offer you some respite if possible.

Lender may have programs around loan restructuring, EMI holiday, increasing tenure thus lowering EMI. This will be specific to each lender and your past payment history with the lender will also play a part.

Some employers have programs in place to assist team members with financial hardship. If you are still in employment and are unsure of whether this is an option, contact your company's human resources department to find out.

Budgeting your monthly expenses and savings is the way ahead to protect yourself from default. In such times, the golden rule of saving at least ten percent of your income comes to one's best use. Creating a contingency fund is always good and advisable. Such contingency funds should be able to cover for 6-7 months of fixed expenses. One can also route their savings into a bank account which is usually used only for bill payments and no extra spending.

This article was originally published on Outlook Money (Author: Wilfred Sigler).