A Moratorium on loan is a specified period during which the borrower is not obligated to make EMI payments of their loans as mandated by the Reserve Bank of India. The moratorium period in loan postpones repayment and gives the borrower a grace period during which they can choose to not make EMI payments for a loan. Apart from the Moratorium on Loan, which was recently provided as a relief post the COVID-19 pandemic, it has been widely used for some types of credit such as education loans to borrowers who require a certain grace period before they can start repaying the loan.
Normally, a moratorium period starts as soon as a loan is approved. It is mostly extended to allow the borrower more time to organise their money and get ready to repay the loan. A loan’s middle stage also has a moratorium period where the lender permits the borrower to stop making payments for a specific reason – for instance, financial hardship over a predetermined length of time. It should be remembered that the loan’s interest typically builds up throughout the moratorium.
An individual takes out a loan and has an Rs.5000 monthly payment but the person’s financial situation worsens to the point that they are no longer able to pay Rs.5000, they call their bank and request a suspension of the loan instalments. The bank consented to a six-month moratorium during which the person would not be required to make any payments.
Since the RBI’s guidelines on moratoriums are dynamic to the circumstances they are announced in, let us look at the norms announced March 2020 to understand the general guidelines:
Using this formula you can calculate your moratorium period,
interest = balance * (1 + r)i – balance
Your lender will use the idea of simple interest to determine the interest on your loan during the moratorium period. The interest will only be calculated on the actual amount offered, not the total amount of the loan. The loan’s principal amount and any interest accrued during the moratorium period will be put together after the accrual of interest. As a result, you will have to start making payments on your EMIs after your EMI holiday is ended. These payments will include both the principal and the interest that accrued during the moratorium period.
Here are some of the key advantages a borrower is entitled to when they choose to accept the moratorium.
A Moratorium on a Loan can assist a borrower in developing a stress-free repayment schedule. It can also assist them in accumulating funds from various sources and beginning repayment in a systematic manner rather than diluting assets to repay the loan.
The COVID-19 outbreak has served as a sobering reminder of the global economic consequences of a pandemic. Thousands of people have had their savings wiped out owing to job losses, pay cuts, and the passing away of family members. As a result, many people faced a cash crunch apart from the emotional tax of losing a loved one. In such a circumstance, a moratorium on loans proved beneficial since it helped millions of people wade off an impending financial crisis.
One of the most essential advantages of a loan moratorium is that it has no negative impact on your credit score. Simply put, non-payment of loans in regular instalments has no negative influence on a borrower’s credit score during the moratorium period. As a result, a moratorium has no bearing on your borrowing capacity.
Moratorium on the loan automatically increases the tenure of the loan. It might affect your long-term financial goals and dent your investment plans.
One of the most significant disadvantages of a loan moratorium is that repayment is not waived but just deferred. This indicates that you owe interest to your bank or lender as a borrower. Moratoriums might also result in increased interest costs, putting additional strain on your future payments.
While a brief halt from debt repayment may provide some relief in the near term, the fact remains that the interest owed will eventually catch up with you. If you haven’t planned ahead, the unexpected pressure of large payments might throw your monthly budget off and disrupt your cash flow.
|Moratorium Period||Grace Period|
|A moratorium period is when your lender allows you to stop making payments for a specific period of time||A grace period is a period after a payment is due, during which you can pay without penalty.|
|The moratorium period is longer than the grace period||If a grace period is offered, they offer it to all their customers automatically.|
|Interest may be charged||No interest is charged|
|A moratorium is similar to a deferment or forbearance.||Not required by law but the law requires that they send you a bill at least 21 days prior to the due date.|
The Central Bank of India declared that all banks and non-banking financial institutions (NBFCs) are permitted to offer a 6-month moratorium on all terms loans, but not limited to personal loans, house loans, and school loans, for the payment of the Equated Monthly Instalments (EMI). This is for the unpaid as of the first of March 2020. This applies to all cooperative, rural, regional, and NBFCs, including housing finance companies.
A home loan is a loan that is provided for the purpose of purchasing a house or a flat which follows fixed or adjustable payment conditions and interest rates.
A moratorium period refers to a period during which your lender does not ask you to make any repayment. The borrower may be short on finances or experiencing financial difficulties during this time period and the lender will acknowledge their current financial situation and give them a few months to sort things out and get their life back on track. Once they sort things out, they can begin rapidly paying off their loan by clearing the EMIs. To prevent a borrower from missing any EMIs or fleeing without paying back the loan, a bank or an NBFC grants a moratorium term during financial hardship.
A loan that is taken out to pursue higher education is known as Student Loan. The student would not have income at that time to repay the loan since a student or a student’s parent or guardian applies. So, the loan can be repaid whenever the student completes the course and begins to make money from their work. This gap in the loan tenure during which the borrower does not have to pay anything is known as the moratorium period. The moratorium in student loans can vary depending on the amount of loan taken.
A Moratorium loan gives you short-term relief from the repayment of loans during financial hardships, although it temporarily halts EMI repayment and assists those who face difficulties in repaying their loans, it is entirely optional and not mandatory for all borrowers.
However, borrowers must remember that applying for a moratorium does not provide any relief for interest amount during the period of the moratorium. Hence, it is advisable to avoid a moratorium if you can sufficiently the means to pay the EMIs on time.
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No, availing of a moratorium in any situation is not mandatory. It is a voluntary decision and depends completely upon the borrower’s discretion who can choose to not avail the moratorium.
For most education loan borrowers, a moratorium period is a standard feature which allows the student a specified time after they complete their education, get a job, and start repaying the loan. However, for other loans, moratoriums may be provided on the basis of the bank’s policy and the circumstances in the country.
The maximum period of moratorium depends on the latest guidelines provided by RBI. For the moratorium imposed in March 2020, the maximum tenure was 6 months.
No, grace period and moratorium period are different concepts at the core. While the grace period can lead to a penalty and a dip in the borrower’s credit score, there is no such penalty for a moratorium.
No, the interest component of the loan is not waived off during the imposition of a moratorium. It gets added to your subsequent EMIs after the moratorium is lifted.
Yes, you still have to pay for the interest during the moratorium period.
No, moratorium period is not mandatory.
In India, banks typically give a moratorium of three to six months.
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