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Why the 3-month Moratorium Period Won’t be RIGHT for You?

Highlights

  • Will the 3-month moratorium period on loan EMIs benefit you?
  • It will depend on the flow of your income and profession, read this to know in detail

In the latest monetary policy meet held on March 24-27 2020, the RBI has decided to give a 3-month moratorium period for all outstanding loans as on March 1, 2020. Remember, this is not an EMI WAIVER. The move is in line with the economic pressures induced by the Coronavirus outbreak. So, this could mean some savings for you on your loan and help you deal with the likely situation of less or no income. Your credit score will not reduce if you don't pay the EMI. But doing so can raise your interest liability as banks would like to cover their losses, which is likely to be the case on deferred EMI payments, by increasing the interest component of the EMI after the moratorium period gets over. So, if you have the money, keep paying to reduce your interest liability. The moratorium, which was ending on May 31, 2020, has been extended till August 31, 2020.

The Reserve Bank of India (RBI) has allowed all public & private sector banks, non-banking financial companies (NBFCs) to shift the EMI payments with respect to the outstanding balances of all retail loans as on March 1, 2020, by 3 months. The move is laudable considering the relief it can provide to many facing the financial stress due to the Covid-19 Coronavirus pandemic. But there’s still a doubt whether the shift will be an automatic one or be left to the borrowers.

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So, if you are salaried and are assured of your salaries on time, you won’t have any problems in repaying your loan. You’ll most likely get the annual increment and bonus next month. Plus, with no travel and fuel expenses owing to the ongoing 21-day lockdown, you’ll have enough to pay your EMIs. All that makes the 3-month moratorium not much of a relevance to you. The article will further substantiate this point with proper reasoning, so keep reading!

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Remember – It’s Not an EMI WAIVER!

You’ll do well not to interpret the latest move of RBI as an EMI waiver. The pending 3 month EMIs could increase the tenure of loans by another 3 months. Once the moratorium period is over, the outstanding amount will have interest of 3 months as well as the interest of the 4th month. You may have to pay 4 EMIs in one go if you want to finish the loan as scheduled. If not, it could increase the loan tenure by another 3 months. Let’s take two loans – personal loan and home loan – and why the moratorium period can be done away with.

Better to Clear Your High-cost Personal Loan Sooner than Later

As personal loans are not backed by any security or collateral, interest rates on them can go as high as 20%-24% per annum, taking out a lot from you. The moratorium could mean the lack of business activity for lenders for three months. Personal loans of most private sector banks are not on a floating rate basis, meaning the cut in the benchmark rate as repo-linked lending rate won’t have any impact on the loan pricing. So, the EMI in the 4th month can be hard to pay as it will include interest and principal for three months as well. That’s why there’s no need to increase your burden if you have money to repay the loan. This will be beneficial both financially and mentally.

Home Loans May be Less Costly, But the Big Size EMI Could be a Concern for YOU!

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Home loans are offered at interest rates ranging from 8%-9.50% per annum, so they are a low-cost loan. And, with the RBI slashing the repo rate by 75 basis points on March 27, 2020, home loans have only got cheaper. But still, there’s no point delaying your EMI payments for 3 months as that will mean the EMI for the fourth month will be a huge one. Plus, with the rate cut,  there are opportunities for you to reduce your interest liability. The steep 0.75% cut in the repo rate will decrease the home loan rate in the same proportion as they have moved home loan pricing to repo-linked lending rate. With that, the principal component of the EMI will be paid more, increasing the scope of finishing the loan earlier.

What Should Self-employed Do?

The move of prepayment can be beneficial to self-employed if they do have the bulk to pay off the loan in full or in parts. Given the slowdown in business and the moratorium taking effect for 3 months, it won’t be advisable to pay in full. Prepay the loan in parts and save something to run your business once the lockdown period is over. The part prepayment will reduce the outstanding loan and the resulting EMIs. No spending on travel, dining and vehicle refills due to lockdown will ensure you have some savings in this dull phase.

Don’t Park Your Money in Low-interest Deposits When Paying High-cost Personal loan or any Term Loan

The fall in the lending rates will mean banks will cut the deposit rates to safeguard their margin. As of now, fixed deposit and recurring deposit accounts yield you interest earnings of around 4%-6% on average. As the lending rates will fall steeply because of the massive 75 basis point cut in the repo rate, the average deposit rates will drop further.

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Personal Loan Interest Rates May 2020
Fullerton India14.00% - 33.00%
HDFC Bank10.75% - 21.45%
ICICI Bank10.99% - 18.49%
IndusInd Bank10.99% - 16.00%
Kotak Bank10.99% - 20.99%
RBL17.50% - 24.00%
Standard Chartered Bank11.50% - 18.00%
Tata Capital10.99% - 18.00%

Home Loan Interest Rates May 2020
Axis Bank8.10% - 8.85%
Bank of Baroda7.25% - 8.25%
Citibank8.20%
HDFC7.75% - 8.65%
ICICI Bank7.70% - 8.80%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank8.20% - 9.25%
LIC Housing7.40% - 8.85%
Piramal Capital & Housing Finance9.00% - 9.10%
PNB Housing Finance8.95% - 9.20%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI7.35% - 8.00%
Tata Capital9.20% - 9.35%