Here's Why Loan Moratorium is Bad for You in the Long Run


29 Sep 2020 | 5 min read

In an attempt to give some relief to borrowers who are struggling to pay their EMIs due to the COVID-19 pandemic and its fallout, the Reserve Bank of India (RBI) had asked banks to offer a moratorium for repayment of term loans for three months until May 31, 2020. The RBI further extended this moratorium period for another three months till August 31. The loans include all sorts of retail loans such as a personal loan, vehicle loan, home loan, gold loan, agriculture loan, and so on. Even credit cards are also eligible for the moratorium.  

Hence, those loan borrowers who opted for the moratorium need not pay EMI on the loan until the next guidelines are issued by the central bank. During this period, the credit score of the borrowers will not get impacted. However, a moratorium does not mean a waiver or cancellation of the interest. The moratorium period allows borrowers to plan their finances better. 

However, you should keep in mind that the loan moratorium will add to your burden in the long run. Hence, it is advisable to opt for the moratorium only if you are facing financial problems to meet your other expenses, otherwise, pay your EMIs regularly.

Here is why opting for a loan moratorium is a bad idea in the long run (3-point analysis)

A moratorium is not a waiver

Borrowers must keep in mind that the moratorium is not a loan waiver, it is a stay to their existing EMI payments for the given time. It is just a moratorium, which means you will have to pay the EMIs later. The interest for the moratorium period will be added to the outstanding amount, hence borrowers will be required to pay a higher EMI or the tenure of the loan will increase when the moratorium period is over. It will put an additional burden on them. 

“The loan moratorium is help for cash flow only, not a reduction in payable amounts. Hence, only those who have liquidity issues (lost a job, cut in salary, etc) should avail the loan moratorium; as they continue to pay interest on the loan outstanding -- and the tenure will be extended by the 3-month period too,” says Lovaii Navlakhi, Founder & CEO, International Money.

The moratorium will extend the loan tenure

Due to the moratorium, the loan closure date/ period will extend which is useless. A deferment of two EMIs could extend your loan by 6 to 10 months. If you have long term loans like a home loan, your tenure could increase significantly. As a result, they will have to pay a higher interest during the loan period if they opt for a loan moratorium facility. 

If you have liquidity enough to pay the EMIs, you must continue with the loan repayments as before.

Interest will increase

The biggest drawback of the moratorium is that the interest payable on the loan will increase. For example, if you opt for a 3-month moratorium, then interest rates for these 3 months will be added on to further 3 months of your total EMI period with more interest. Suppose you have availed a home loan of Rs. 50 lakh at 8.5% p.a. interest rate for 20 years, and you opt for the 3-month moratorium. Then the present 3 months interest will be added to the remaining 20-year EMI period, which means you will have to pay extra interest for 3 months which you opted as a moratorium. The total cost of missing 3 EMIs of Rs. 43,391 each will jump to Rs. 4.48 lakh. However, the impact will not be that big for individuals who have completed 10 years of the loan tenure. 

If moratorium availed for three months

RBI has instructed banks to give this benefit to their customers, but it totally depends on banks how they surpass the benefit to their term loan customers. Some banks are extending the moratorium facility if customers sought for it. During the moratorium period, your credit score will not be impacted even if you skip the EMIs.  

While the deferral will provide some relief, the cost will add up in the coming years. Financial experts suggest that if you are capable of paying the EMI during the moratorium period, don’t avoid the payment. Only those who are facing liquidity issues or who are expected to be adversely affected in terms of cash flows should avail the loan moratorium.

Don’t take the moratorium only because you think the government is offering it. Assess your present and future financial status to make the decision regarding a loan moratorium. Opting for a moratorium will also have tax implications. The tax reduction which you get on interest payments will be impacted if you avail moratorium. In a nutshell, its drawbacks outweigh the benefits.  

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