What are the effects of the three-month moratorium?



With the nationwide lockdown, the economy has seen a major setback. The banking regulator RBI has asked banks and financial institutions to give a three-month moratorium on loan obligations.


What is a moratorium?

It is a temporary repayment holiday whereby borrowers can decide whether to pay or not to pay EMIs on their loans. RBI recently announced moratorium for a period of three months from Mar1- May 31, 2020. This moratorium is applicable for retail loans such as care, personal, home, education, gold loans, loan against securities and monthly credit card dues.


Although the non-payment of dues will not affect your credit score there are some things that you need to aware of.

1. Nothing is “free”

While you need not pay your EMIs during the moratorium, do remember that the interest will keep accruing during the period.


For instance, if you have a loan of Rs.50 lakh, the EMI for 15 years at 8% annually will amount to Rs.47,783. If you opt for the moratorium, your EMI dues will be added to the loan outstanding at the end of three months. This can either increase your loan tenure or your EMI amount.

2. Use your emergency fund

An emergency fund is a great way to sail through any cash flow crisis.

Choose moratorium only as a last resort as you will end up paying high interest on the outstanding loan.

3. Loan stage matter

If you are in the earlier stages, higher EMI will be more economical as it will help save on interest payments. This is because in the initial stages a large portion of the EMI goes towards paying the interest as against repayment of capital.

Using the above example, if you opt for a moratorium after paying EMI for five years, your tenure is extended by 6.7 months and you will end up paying Rs.2.26 lakhs more (if you don’t want to increase your EMI). On the other hand, if your EMI is increased to keep the same tenure, EMI increases by Rs.1,779.

However, the equation will be different if you are in the late stages of the loan. That is because at that stage a major portion of EMI payment goes towards capital repayment. So, if you opt for a moratorium at say 12 years, your EMI will increase by about Rs.71,000 more. If you opt for a constant tenure, your EMI will increase only by Rs.3,049.

4. Bank rules

Every bank has their own implementation policies. Some banks are emailing or sending SMS to their customers asking them to opt-out of the moratorium. If you don’t, it will be assumed that you have chosen it.

On the other hand, some banks are specifically asking to opt for the moratorium.

You will have to check with your bank for specific details.


Some banks are ready to reverse the payments if you have already paid EMI for the month of March. Other banks are not doing or setting a cut-off date.

5. Credit card users

If you have any credit card dues, a late payment penalty will not be levied during the moratorium. However, an interest rate of around 40% will per annum be charged on the outstanding. Also, it will be charged from the date of purchase and not on the due date of payment.

Some credit card companies are not allowing fresh purchases if you don’t pay the minimum amount due during the moratorium.

Do check with your credit card company for more details.

6. Student loan

You cannot extend a student loan during the moratorium period. However, if you have only principal moratorium for your education loan, you can avail moratorium for your interest payments.

Conclusion

Tap your emergency fund to mitigate cash flow issues and continue to pay your EMIs as usual. Check your bank policies if you are opting for the moratorium.

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