Moratoriums Good Vs Bad

Moratorium

 

What is Moratorium?

A moratorium is a delay or suspension of an activity or a law. In a legal context, it may refer to the temporary suspension of a law to allow a legal challenge to be carried out. 

The important term in the announcement is ‘Moratorium’ which means it is just a deferment on repayments. It is not a waiver and lenders will continue to charge the interest on the due amount. However, opting for the moratorium will not have any impact on the credit profile of the borrower. 

 

Why is Moratorium?

Moratorium period effectively allows a borrower to postpone repayment of liabilities and help in planning his/her finances better. As a practice, banks and other financial institutions offer moratoriums to students taking education loans. As there might be a time lag between students completing their studies and getting a job, student loans usually a built-in provision for repayment holiday. Some lenders offer moratoriums on home loans as well, but in the current situation, banks are allowed to offer moratoriums on all kinds of loans for three months, without any such delay or default counting as a default or bad loan. Similarly, if you are running a business, in respect of working capital facilities, lending institutions are permitted to defer the recovery of interest applied (cash credit/overdraft) for this moratorium period.

 

Moratoriums Good Vs Bad

 

Advantage of Moratoriums

If you are among the individuals whose income has taken a hit due to the pandemic outbreak and the impact of the lockdown, then the moratorium may be a godsend. Your non-payment of interest or principal amounts during these three months will not be considered as a defaults and will not affect your CIBIL score. However, the interest accrued during this period can come back to pinch your pocket when the moratorium ends. The interest can be particularly high for personal loans and credit cards.

Disadvantage of Moratoriums

Additionally, the EMI amount will be higher after the moratorium period is over. This is despite low savings in the initial few years of interest payment. for Example:

Consider a loan of Rs 5 lakh at an interest of 12 per cent per annum for a tenure of five years. Over the five-year term, the EMI on this loan works out to Rs 11,122 and the interest payable works out to Rs 1.67 lakh, taking your total dues to Rs 6.67 lakh. But if you avail of a three-month moratorium, your EMI rises to ₹11,459 and you end up paying ₹6.87 lakh to the bank, after accounting for the longer tenure due to the moratorium period. However, borrowers need to check with their bank on the exact interest calculation and other terms and conditions.

 

What a borrower should do

If you are facing a cash crunch and expect it to resolve in a few quarters or years, a home loan with a moratorium is a good option. Just like an education loan, a moratorium is required because all borrowers may not be able to repay immediately after borrowing. However, if you are purely looking at temporary savings and relief, this is not the right choice.

At the same time, if the borrower can manage EMI from the very beginning, they should not go for moratorium even if the offers sound tempting. Keeping loans unpaid for longer increase the outflow because of interest being continuously added to the principal amount.

 Before taking decision you should calculate your EMI amount accordingly for your future financial planning you can download the calculator from the    link https://drive.google.com/file/d/1ANmkbTotQ07opaKCxeMhfnnYmcCVJNfH/view?usp=sharing

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