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Bypass the moratorium, and instead lower your interest rate

The objective behind this move was to give immediate cashflow relief to individuals given that the economic lockdown could have severe negative impact on jobs and earnings. Even if you qualify for this, don’t opt for it unless you have run out of all your savings.

There was a sigh of relief two months ago when the Reserve Bank of India announced a three-month moratorium on loan repayments. Anyone who had a loan with banks and NBFCs could avail this benefit and not have to make any repayments for the months of March, April and May.

Last week RBI announced an extension of three more months, till August, on this moratorium. Which means, if you haven’t already, you can now approach your bank for a three-month relief or stoppage in your loan monthly repayments.

Should you go for it?

To make the impact pervasive, RBI has included credit card dues, EMIs and all other such loan repayments in this facility. You may have a loan from a commercial or a co-operative bank or an NBFC, all such loans will qualify. Typically, you will have to approach your bank or financial institution who has lent you money to ask for the moratorium. 

The objective behind this move was to give immediate cashflow relief to individuals given that the economic lockdown could have a severe negative impact on jobs and earnings. Even if you qualify for this, don’t opt for it unless you have run out of all your savings. 

While you will get immediate relief, the unpaid interest for the period given will get added on to your loan outstanding amount. This means you are either looking at a longer repayment tenure or a higher EMI. A longer tenure means more interest to be paid.

At the end of the day, it will increase your loan cost. While the lockdown is negative for earnings, it has proven to be positive for savings, given that there is practically nowhere to spend money other than groceries. Use this to keep repaying your loans to the best of your abilities. Use the moratorium as an absolute last resort. 

This does not mean your home loan interest rate will go down to the of Repo, rather it will adjust proportionately lower, giving you some relief. When this renegotiation is done, make sure you lower the amount of your monthly instalment (EMI) rather than opting for lower loan tenure. 

Take advantage of rate cuts

The Reserve Bank of India, last week also announced another 40-bps cut in the benchmark repo rate bringing it down to 4%. If your home loan rate is still at 8.5% per annum and you have a floating rate loan, pick up the phone and ask your bank manager to readjust the interest rate lower in line with the fall in repo rate.

This does not mean your home loan interest rate will go down to that of the Repo rate, rather it will adjust proportionately lower, giving you some relief. When this renegotiation is done, make sure you lower the amount of your monthly instalment (EMI) rather than opting for lower loan tenure. 

A lower EMI will help provide some relief to your stressed cashflows.

Banks earnings come from the interest you pay, it's unlikely they will let go of that. The moratorium simply kicks the expenses further down, instead of reducing it, it has the effect of increasing your cost. Be wise and keep that only as the very last resort. 

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