The Reserve Bank of India announced a moratorium of three months (till May 31) on term loan and credit card installment payments in March to allow borrowers some time to get their finances in order. The moratorium is a choice and can be availed for some temporary relief.
Have You Wondered How Much Opting for the EMI Moratorium will Cost You? Read on.
If you have opted for any term loan, be it a personal loan or a home loan, it would help to understand that the bank will charge an interest for your unpaid loan during the moratorium period. So, when you miss a couple of installments, your loan gets stretched by another six to ten months or your EMI will go up by up to 1.5 per cent. Essentially, banks not only charge interest on your outstanding amount but also on the interest that will add up on this outstanding amount during the EMI moratorium period.
What’s the Cost of a Moratorium?
So, consider this: You have availed the moratorium on your term loan. You have a home loan of Rs 50 lakh with a 20-year tenure, and your interest rate is 9 per cent. If you skip your EMIs for two months, say April and May, banks may give you three ways to handle this. You may pay the interest that has added up over the two months in June in one shot. Assuming your remaining tenure is five years, your interest will add up to a little over Rs 32,000. However, if you have only recently borrowed a loan, and your remaining tenure is 19 years, then you will have paid an interest of over Rs 73,000.
However, this is not the only option. Banks may give you the option of adding the interest to your outstanding home loan amount. This means your EMI will go up for the rest of your repayment tenure. The degree of increase depends on your remaining tenure. If you have only five years left, the increase on EMI could amount to just over Rs. 650 (in the example above) whereas if your remaining tenure is 19 years, then the EMI may go up to over Rs. 45,000.
The third option is to ensure that the EMI is the same but in such a scenario, your home loan tenure may get extended. You may have to extend your loan tenure by a month, six months or 10 months, depending on what your remaining tenure is.
(Source: Economic Times 1)
Here’s another example: You have borrowed a loan of Rs 50 lakh, and your interest rate is 8.5 per cent per annum. Your remaining tenure is 19 years. You have opted for a moratorium on the 13th and 14th month. Your interest for two months of EMI will be nearly Rs 70,000. You may have to extend your EMIs to nine months over and above the original tenure of 20 years. On the other hand, if you have five years of tenure remaining, and you have deferred your EMI for two months, ie, 181st and 182nd, the interest of your two month EMIs will be Rs 30,000. You may have to pay EMI for a month extra.
(Source: Live Mint2)
What to Keep in Mind While Opting for a Moratorium on Your Term Loan
While opting for a moratorium, borrowers must bear in mind the power of compounding. The longer your remaining tenure, the greater the interest. This happens because, in the initial stage of loan repayment, your interest makes up for the bigger chunk of your EMI. The interest drops as your remaining tenure drops. As your repayment tenure approaches the end, your principal amount makes up for a major part of the EMI, and the interest portion comes down drastically. So, if you are a new borrower, you will end up paying more. On the other hand, if you have been repaying for a longer period, say 12 to 15 years, you will not be affected by the accruing interest.
If you have a comfortable amount of savings, you may pay your EMI on time. Opting for an EMI moratorium will add to the interest and you will end up paying much more than your outstanding amount. Opt for a moratorium if you have a cash crunch and are unable to pay your regular EMI because you don’t have much of a balance in your account. In such a scenario, a moratorium period will help you get your finances in shape and help you plan your term loan EMI repayment accordingly.
Banks and online lending platforms have come up with easy-to-use moratorium calculators to help you compute the interest and your EMI amounts if you were to opt for the moratorium in May. You could use this calculator to get an idea and plan your finances accordingly. In conclusion, the moratorium doesn’t act like a waiver, and even if you skip EMIs for a couple of months, you will have to pay interest. If you are a relatively new borrower, you will end up paying more or for a longer period. If your repayment tenure is short, you will not be affected much by the interest accrued owing to the moratorium.
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