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Six things to know about three-month moratorium on your EMIs

A moratorium is a temporary repayment holiday, whereby borrowers will have the option to either pay or not pay EMIs on their loans. It is applicable for all loan obligations for the three-month period (March 1-May 31, 2020) and for most categories of retail loans –home, car, personal, education, loan against securities and gold loans - including monthly credit card dues.

With economic disruptions caused by the nationwide lockdown, the banking regulator RBI asked banks and finance companies to give a three-month moratorium on various loan obligations. 

What is a moratorium?

Moratorium is a temporary repayment holiday, whereby borrowers will have the option to either pay or not pay EMIs on their loans. It is applicable for all loan obligations for the three-month period (March 1-May 31, 2020) and for most categories of retail loans –home, car, personal, education, loan against securities and gold loans - including monthly credit card dues. 

Non-payment of dues during this period will not affect one’s credit score. 

As a borrower, however, you need to be aware of the following: 

1. No Free Lunch

While you need not pay the EMIs, the interest keeps accruing during the period. For instance, if you have a Rs 50 lakh loan, EMI will be Rs 47,783 for 15 years at 8 per cent annually. If you opt for a moratorium, EMI dues for three months will be added to the loan outstanding at the end of three months. It will either end up increasing your loan tenure or that of your EMI.  

2. All depends on the loan stage

Which is better? A lot depends on the stage of your loan. If it is in the earlier stages, higher EMI works out more economical, as you save on interest payments. This is because, during the early stages, a larger portion of the EMI goes towards paying interest (as against repayment of capital). 

In the above example, if you opt for a moratorium after paying EMI for five years, loan tenure gets elongated by 6.7 months and you pay 3.7 EMIs additionally (Rs 2.26 lakh more) if you don’t want to increase your EMI obligations. In contrast, if your EMI is increased to keep the tenure intact, EMI increases by Rs 1,779 (Rs 2.08 lakh more). 

However, if you are in the late stages of the loan – say 12 years – the equation changes. That’s because at this stage, major portion of EMI payments goes towards repaying the capital. So, opting for a three-month moratorium will increase your EMI by only 1.5 months (about Rs 71,000 more).  Alternatively, if you opt for constant tenure, EMI increases by Rs 3,049 (about Rs 1.01 lakh more). 

Ensure you check with your bank over the selection of the options.

Which is better? A lot depends on the stage of your loan. If it is in the earlier stages, higher EMI works out more economical, as you save on interest payments. This is because, during the early stages, a larger portion of the EMI goes towards paying interest (as against repayment of capital). 

3. Tap Emergency funds 

A well-padded emergency fund will temporarily help you sail through any cash flow issues. Opt for the moratorium only as a last resort, as you pay high interest on the loan outstanding. 

4. Know the bank rules

Banks differ in terms of implementation policies. Some are asking customers to opt-out (of moratorium) – by sending an email or SMS. If you don’t do that, you are assumed to have chosen it. Others specifically ask to opt-in to avail of the moratorium. Check your bank’s website for specific details.

What if you have already paid EMI for the month of March? While some banks are ready to reverse the payments, others are not doing it or have a cut-off date. For instance, ICICI bank has a cut-off date of March 27 for encouraging reversal requests. 

5. Beware Credit card users

If you are having credit card dues, you will not be levied a late payment penalty during the moratorium period.  However, the interest rate will be charged at about 40 per cent per annum on the outstanding. Moreover, it will be charged from the date of purchase and not the due date of payment.

Some credit card companies don’t allow fresh purchases if you don’t pay the minimum amount due during the moratorium period. So, check with your credit card company. 

6. Student knowledge

If you have taken a student loan and are currently in the moratorium period, you cannot extend it. However, if you only have principal moratorium running for your education loan, you can avail of the moratorium for interest payments as well.

Takeaway

Borrowers pay significant interest during the moratorium period. So, tap your emergency fund to mitigate cash flows problems and continue to repay your EMIs as usual. If you are opting for the moratorium, check bank policies and the stage of your loan for further evaluation.

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