Every Insight and Detail on Moratoriums

Loan moratoriums have been frequently debated in India since the beginning of the Covid-19 outbreak.

To provide temporary respite to debtors during the pandemic-induced economic downfall, the country's central bank announced an immediate three-month moratorium on all term loans, which was then extended to three additional months, from March 2020 to August 2020.

However, the term loan moratorium is relatively new in your BFSI (Banking, Finance, and Insurance Sectors) language. Here is every minute detail you need to know about loan moratoriums and how they may help your financial situation.

What is the primary concept of a Loan Moratorium?

Suppose you took a house loan to fund the purchase of a home. However, due to certain circumstances, starting with the EMI instantly is not a viable alternative.

You may also choose to postpone your house loan payments if the investment project is delayed due to construction. When this actually happens, you can take advantage of the moratorium term offered by your financial lender. 

A moratorium period is a particular span of time during which the borrower is not required to make loan EMI payments.

In the case of the example mentioned above, you do not have to begin repaying your house loan as soon as it is given to you. Instead, you can take an EMI holiday and resume payments after a break.

Lenders provide this service to assist you in better arranging your budget and become more organized in getting acquainted with the extended responsibility of a house loan. There are many online financial organizations that also provide personal and home loans with the advantage of a moratorium period incorporated within it.

Who Qualifies for obtaining a Loan Moratorium?

Loan moratoriums are available for various types of loans, including house loans, personal loans, school loans, credit card payments, etc. 

However, students who have taken education loans are the most likely to use them. Because there may be a long period of time between students completing their educational programs and finding work, instant repayment of student loans is never easy.

That is why most student loans include a default option for an EMI repayment holiday or moratorium.

Apart from student loans, house loans are more likely to feature a moratorium clause since they involve large sums of money. As a result, the borrowers may require time to get their financial affairs in order before beginning the repayment schedules. 

So, if you are dealing with a student loan or a house loan, you can get the advantage of a loan moratorium. However, you must first consult with your financial lender if they have loan moratorium clauses in their EMI procedures.

Features of the RBI's EMI Moratorium in Light of COVID-19

The Reserve Bank of India (RBI) suspended EMIs for six months, from 1 March 2020 to 31 August 2020, to help borrowers deal with the financial consequences of the worldwide pandemic. This moratorium applied to practically all forms of loans, including house loans, university loans, and even personal loans.

What are the benefits of the Loan Moratorium?

Let me break down the significant advantages of a loan moratorium to you in simple words.

Arrangement of the budget and repayment plan with ease 

You can now enjoy a better repayment plan. With the option of a loan moratorium, you may simply arrange your budget and how you wish to return the borrowed money by using the extra time given.

It can also assist you in accumulating cash from various sources and beginning repayment in an organized manner rather than rushing to pay without adequate finances.

Loan moratorium periods can be used to plan for monthly income and spending and save for future EMIs and other obligations.

EMI amounts can be utilized in a more organized way

Furthermore, the EMI amount that is not required to be paid during the moratorium period may be utilized for other reasons as long as they are consistent with the borrower's financial objectives.

No negative impact on Credit score 

You will generally encounter no adverse effect on your CIBIL or other forms of credit score if you use the loan moratorium. Simply said, non-payment of loans in regular installments has no negative impact on a borrower's credit score. 

However, this was not the case with the COVID loan moratorium. Which is why it is important to consult with the lender as well as your financial advisors before opting for a moratorium.

An economic relief of a considerable measure during the pandemic

Loan moratoriums were a welcome relief during the Covid-19 crisis. The Covid-19 outbreak has served as a clear reminder of the disastrous impact that a single incident may have on the world economy.

Thousands of countrymen have had their savings wiped away owing to job loss or the treatments and death of the family's primary source of income. As a result, many people are facing a financial shortage or a liquidity crisis. Loan moratoriums will possibly provide relief during future liquidity crises as well.

Loan moratoriums have helped SMBs 

Small businesses and SMBs are the backbone of the country's economy. However, their operational costs are funded mainly by the central government.

If you are facing lower wages, or if you work in the unorganized sector or small businesses that have seen a significant drop in profits due to the pandemic, then go for a loan moratorium.

A temporary break in loan repayment can assist individuals in distress in taking stock of their financial situation and planning for a better future.

There is no such thing as free lunch. The same logic works for the loan moratoriums too.

Let's check out their main disadvantages so that you do not falter while availing a loan moratorium in the future. 

  • To begin with, the moratorium is not a waiver. The EMIs will have to be paid subsequently. Considering that unpaid EMIs will be added to the principal, you will end up paying a higher EMI for the remainder of your loan term.

This will place additional stress on you. So, while you may be relaxed during the moratorium period, you will eventually have to deal with the payback amount.

  • When dealing with long-term loans, such as home loans, the loan's duration may lengthen. As a result, if you use the loan moratorium option, you may have to pay a higher overall interest amount during the loan time.

  • Choosing a moratorium will have tax consequences. If you select a moratorium, the tax break you get on interest payments will be reduced.

  • Deferring at least two EMIs might result in a 6- to 10-month extension of your loan.

  • Compared to the current interest rate, the loan's interest payments will be more significant when the moratorium is officially over. 

Before opting for loan moratoriums, you should know a few points. These are:

  1. Keep in mind that the terms and circumstances of your home loan's moratorium period may differ between financial lenders.

  2. To prevent misunderstanding and make the best decision, search for lenders who give a suitable break during the first years of the loan term.

  3. Remember to carefully examine your loan interest rates since many lenders may raise the interest rate once the vacation season is over to compensate for the break.

  4. This is particularly common with house loans with adjustable interest rates. Using the EMI calculator of MoneyView, you can determine how your EMIs will be affected.

  5. Once you've chosen a lender, talk to them about your demands and clarify any additional charges and processes ahead of time. This guarantees that you can obtain simple repayment conditions for the entire period, even after the EMI break.

Conclusion

As previously stated, a moratorium may be a significant benefit for people seeking a temporary reprieve from financial troubles and considerable cash flow issues. However, suppose you want to take advantage of the benefits of a moratorium, you must do so with the purpose of being disciplined when it comes to repayments after the moratorium period ends. Loan moratoriums should be used only by persons who have urgent financial requirements and the ability and responsibility to make repayments later.

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