All You Need to Know About Moratoriums

Unprecedented events can have a significant impact on all aspects of the economy. A case in point is the ongoing COVID pandemic which has changed the way the world lives. Economically, a majority of the world’s population has been affected detrimentally with millions losing their jobs, being unable to pay their debts, and so on. In such situations or other economic distresses, the government of the country and financial institutions usually put together solutions to help individuals tide over the situation as easily as possible. This can be done by changing economic policies, tax rate reductions, an extension of loans, or through moratoriums.

What are Moratoriums?

Moratoriums, also known as the loan moratorium period, is a grace period after the loan has been disbursed by the lender during which the EMI need not be paid. This period can range from 2 months to 6 months or even over that depending on the lender’s decision. Moratoriums are usually provided during economic crises in order to help the borrowers with their repayments. However, this does not mean that the interest rate has been waived during the moratorium period. It will have to be paid back once the loan repayment schedule restarts. These ‘EMI holidays’ are also offered to home loan borrowers.

Benefits of Moratorium Period

There are multiple benefits for the borrower if a moratorium period is availed as explained below:

  • Better financial planning is possible. In case the EMI to be paid is higher than expected or a more viable financial situation is expected in the near future such as increased income through job switching, then the moratorium period can be used to plan finances better
  • Additionally, the EMI amount that does not have to be paid during the moratorium period can be used for other purposes as long as they are in line with the borrower’s financial goals.
  • In terms of global economic crisis such as the one brought about the Coronavirus pandemic currently, borrowers can use the time to save up better and get their finances in order so as to continue their EMI payments in the future without incurring further debt.

Features of the EMI Moratorium Granted by RBI in Light of COVID-19

As a relief measure, The Reserve Bank of India (RBI), to help borrowers tide over the financial issues caused by the global pandemic had announced a moratorium period of six months on all EMIs between 1 March 2020 and 31 August 2020. This moratorium was available on almost all types of loans from home loans to education loans, and even personal loans. To know more about this, check out our extensive article on the same.

Disadvantages of Moratorium Period

While the moratorium period is a boon to those struggling to repay their EMIs, it does come with a few concerns as well. Some of these are:

  • While the loan repayment period is extended, there is no relief offered in terms of rate of interest as it is not waived. Borrowers will have to repay the necessary amount along with the interest rate previously agreed upon once the moratorium period is over
  • The credit score of the borrower tends to get affected if he/she opts for a moratorium period due to the delay in repayment. However, as this measure is offered by the lenders themselves, borrowers are advised to consult with their lending institution directly regarding this
  • While a delay may offer a short term relief, if this period is not utilized wisely to build finances, borrowers may be burdened even more heavily later on. Therefore, it is essential to choose this option only if the borrower is sure that his/her financial situation can be managed optimally

Loan moratorium periods exist for the purpose of providing financial relief to the borrower but only if utilized wisely. Consulting financial experts prior to opting for the same, checking compatibility of moratoriums with financial goals, etc. are all important measures to take.