Why Should You Avoid a Moratorium on Loan Payments?
Last Updated : Sept. 29, 2020, 8:14 p.m.
Banks have started responding to the latest directives issued by the Reserve Bank of India (RBI) asking lenders to restructure loans of borrowers facing loan payment issues due to COVID-related stress. Top banks like SBI, HDFC Bank and ICICI Bank have already unveiled their loan restructuring plans. The RBI didn’t extend the moratorium period for borrowers beyond August 31, 2020, while briefing the media about its plans for loan restructuring. However, the banking regulator has allowed banks to include the moratorium option as part of their loan restructuring scheme for borrowers. State Bank of India (SBI) has has included a moratorium option in its loan restructuring plan. The bank allows borrowers to get a loan moratorium of upto 24 months.
You may feel good hearing the moratorium option, which means the luxury of not paying the Equated Monthly Installments (EMIs) for a specific period. But availing this could make you pay much more over the loan tenure. In this post, we have elaborated on the moratorium cost. Read it and take the right step for yourself.
Reasons That Make Moratorium Not a Good Option for You
You have more than one reason to discard the moratorium option given the way it is going to be implemented by banks going forward. We have explained the reasons below. Take a look.
Firstly, It’s Not an EMI WAIVER
All those thinking that a moratorium comes with an EMI WAIVER must get their concepts clear about this phenomenon. You won’t get relief on even a single EMI – the bank will recover all your payments. The only thing is that you are allowed not to pay the same for a specific period on using the moratorium.
There Won’t be any Relief on Interest for Borrowers Availing the Moratorium Option
The bank will charge interest for the time you don’t pay the EMI using the moratorium option. After the moratorium period gets over, the bank would charge on the new outstanding balance (Outstanding Balance at the time of using the moratorium option + interest levied on it month after month). In case you opt for a very long moratorium period, you could end up paying much more given the cost mathematics that banks will apply.
Post Moratorium, Banks Could Charge Loans at a Higher Rate of Interest
If we go by the SBI Loan Restructuring Scheme, the bank will charge an additional rate of interest once the moratorium period gets over. Other banks could also follow this loan pricing mechanism. Adding the interest that will get levied during the moratorium period to this additional interest rate will increase your repayment burden further.
Unpleasant Feel of Continuing the Loan for Long
Loans have both financial and mental implications for us to bear. Above, you saw how the moratorium increases your cost. Plus, with the moratorium on, you can’t spend on your luxuries. In case you take a moratorium on long-term loans like a home loan, it will keep nagging in your mind and make you more conscious with each passing day. Just for the sheer mental peace, it’s better to get rid of debt obligations ASAP.
After checking the reasons to discard the moratorium option, it’s time we check its effect on some loans individually. That will help understand the matter even more.
How Will the Moratorium Impact Your Personal Loan Repayments?
It will depend on the outstanding balance, the moratorium period, the interest rate chargeable during and after the moratorium, etc. Let’s consider an example to understand the same.
Example – You are servicing a personal loan worth INR 7 lakh for the last 2 years at 15% per annum. The loan still has 3 years to go from here. Now, you are contemplating a moratorium of 1 year under the loan restructuring scheme. How much will you end up paying to the lender if it charges you 0.60% extra? Let’s find out!
| Loan Aspects | Amount (In INR) |
|---|---|
| EMI Payable at 15% Before Moratorium | 16,653 |
| Interest Payable Without Moratorium | 2,99,177 |
| Current Outstanding Balance | 4,80,392 |
| Interest Paid Till Now | 1,80,063 |
| Interest to be Levied During a 1-year Moratorium Period | 62,898 |
| Outstanding Balance After Moratorium | 5,43,290 |
| New EMI at 15.60% | 18,993 |
| Interest Payable After Moratorium | 1,40,471 |
| Total Interest Liability | 3,20,534 (1,80,063 + 1,40,471) |
| Extra Cost | 21,357 (3,20,534 - 2,99,177) |
You could see an increased EMI for you after the moratorium period of 1 year. Your overall cost rises by INR 21,357.
Home Loan Moratorium Can Increase Your Cost Much More
Considering the massive home loan quantum that one pays over a maximum of 30 years, a moratorium can only add more burden for borrowers. The average home loan amount can be anywhere around INR 30-60 lakh considering the property rates prevailing these days. If you are contemplating a moratorium on a home loan, do consider the example below and see whether you can afford such a deal.
Example – Your home loan of INR 40 lakh has been running for the last 3 years. The loan was taken at an interest rate of 8.35% per annum and for 20 years. If you go for a 1-year moratorium and the lender charges an additional interest rate of 0.30% after the said period, how much will you pay in the end? Let’s check out!
| Loan Aspects | Amount (In INR) |
|---|---|
| EMI Payable at 8.35% Before Moratorium | 34,334 |
| Interest Payable Without Moratorium | 42,40,188 |
| Current Outstanding Balance | 37,35,091 |
| Interest Paid Till Now | 9,71,120 |
| Interest to be Levied During a 1-year Moratorium Period | 3,07,958 |
| Outstanding Balance After Moratorium | 40,43,049 |
| New EMI at 8.65% | 37,899 |
| Interest Payable After Moratorium | 36,88,425 |
| Total Interest Liability | 46,59,545 (9,71,120 + 36,88,425) |
| Extra Cost | 4,19,357 (46,59,545 - 42,40,188) |
You can see the moratorium is increasing your home loan repayment by as much as INR 4,19,357 (approx.). As the home loan is offered predominantly on a floating rate basis where the interest rate changes with the change in market rates, the repayment estimate shown above may differ. But you will still pay much more to the lender.
Some Lenders Might Increase Your Loan Tenure Instead of Giving You a Moratorium – Shall You Go for It?
Increasing the loan tenure will decrease your EMI but not the overall interest you will end up paying to the lender. Even when the tenure increases by around 6 months to a year, it can raise your interest burden considerably, particularly when it’s about a long-term loan like a home loan.
Conclusion
A moratorium gives you temporary relief from loan payments. But you won’t enjoy paying more by using this option. In some cases, the extra payment can be massive, like the way we have witnessed in a home loan case above. So, if your income is not affected badly by the pandemic, you should avoid a moratorium. A slight decrease in your monthly remuneration should not bother you much. Make changes to your spending routine and continue to pay the loan. In case you are working from home, it becomes easy for you to avoid a moratorium. You must have cut down on your travel and fuel expenses over the last 6 months being in a WFH mode. It’s time to capitalize on that and prevent unnecessary costs that come with a moratorium