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Finance can seem confusing and overwhelming, especially if you are new to handling money. When you enter a financial agreement, you need to understand key financial terms, especially if you are taking a big amount of loan. One important term is the moratorium period.
Knowing how it works can help you make smarter decisions and stay ahead in your financial journey. This period can offer a much-needed breathing space during times of financial stress. But it's not a free pass, understanding the implications, both benefits and costs, can make all the difference in how effectively you manage your debt.
The moratorium period means a temporary pause or suspension of an activity. In case of a loan, the period starts right after the approval. Your first payment will start right after the end of the period. You will get time to rearrange your finances in order before the repayment period begins.
The period can also start midway through your loan terms if you face a sudden financial crunch. Here, the bank agrees to set a due date. But, keep in mind that you have to pay the interest rate during this period.
A moratorium period on a loan can offer several advantages, especially during times of financial uncertainty. Some of the key benefits of a moratorium period on loan include:
A moratorium provides immediate relief by pausing loan repayments. If you're facing financial difficulties, this break helps you avoid further financial stress.
With EMIs temporarily on hold, you can manage your cash flow more effectively and focus on stabilising your financial situation.
Skipping EMIs without a moratorium usually leads to penalties. Choosing a moratorium helps you avoid defaults and the consequences of missed payments.
Delayed EMIs can harm your credit score. A moratorium safeguards your credit history by giving you time to recover financially.
The moratorium period allows you to review your finances, create a new budget, and plan your loan repayments with more clarity.
During financial strain, many borrowers take out another loan to cover expenses. A moratorium offers relief without adding to your debt burden
The interest during the moratorium period depends on the type of loan and the lender's terms. Common methods for calculating interest include:
Simple Interest Formula
Interest = Principal x Interest Rate x Time Period
Simple interest is calculated only on the principal, not on any previously accrued interest. For example, suppose you have taken a personal loan of ₹2 Lakhs at an annual interest rate of 10%, and you opt for a 3-month moratorium. The interest would be ₹5,000 [₹2,00,000 × 10% × (3/12)].
This means that ₹5,000 in interest would accumulate over the moratorium period. Once this period ends, the lender might give you the option to either pay this ₹5,000 upfront or add it to your total loan amount.
Compound Interest Formula
A = P (1 + r/n)^(nt)
In this case, interest is added on both the principal and previously accrued interest. For example, you take a loan of ₹10 Lakhs at an 8% annual interest rate, compounded quarterly. If you choose a 6-month moratorium, the interest is compounded twice (once every quarter) during that period.
Using the compound interest formula, the total amount after 6 months would be:
A = ₹10,00,000 × (1 + 0.08/4)^(4×0.5) = ₹10,40,400
This means the interest accrued during the moratorium is ₹40,400. The extra amount will either be added to your outstanding loan or adjusted in your future EMIs.
Revised Repayment Schedule
After the moratorium ends, your lender may provide a new repayment schedule based on the accrued interest.
For example, if your loan had a 20-year tenure, your lender may extend the tenure or increase your EMI after the moratorium to adjust for the interest. Always review the new plan carefully and ask questions if anything is unclear.
While both of the methods offer relief from EMIs, they have some differences. Here is how they differ:
| Moratorium Period | Grace Period |
|---|---|
The moratorium period is the time during which the lender allows you to skip EMI payments. |
The grace period is the time after the due date to pay the EMI without penalty. |
Even with a moratorium, the lender may still charge interest on the outstanding amount. |
There is no interest rate involved during the grace period. |
The period ranges from 3 to 6 months. |
It usually stays for 20 to 25 days. |
The lender gives a period of relief during a financial strain. |
Lenders commonly offer a grace period to all their borrowers. |
A moratorium period demonstrates a lender's willingness to support borrowers, building trust and positive relationships. By allowing borrowers to postpone payments, the risk of defaulting on the loan decreases. It will not hurt your credit score, and you do not have to pay any late payment fees during the period.
Banks provide this facility for key reasons including:
Support during financial hardship
Reduce risk of loan default
Build trust and positive relationships
Improve borrowers’ cash flow and financial planning
Protect borrowers’ credit scores
Manage interest and loan tenure
Loans that come with a moratorium period allow borrowers to pause their loan repayments for a specified duration. The loans that may have this option include:
Home loan
Education loan
The time relief can be beneficial for borrowers when they are struggling financially. Here, you do not have to pay any penalties for not paying your EMI.
A moratorium period is a time of relief that your lender allows you to take when you are facing financial strain. The grace period is the time after the due date to pay the EMI without penalty.
The only charges you have to pay during this period are the interest rate on the outstanding amount.
You have to resume your repayment procedure after the end of the period.
No, you have to pay the interest rate on your principal amount during the period.
In easy words, it is a time period where your lender allows you to take a break from paying EMI. The lender will allow you mainly if you have a valid reason for not being able to pay it.
A 12-month moratorium period on loan means you do not have to pay EMI for that many months. But you still have to pay the interest rate on the outstanding amount.
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