Moratorium may make your loan expensive but will protect your credit score

Reserve Bank of India has extended the moratorium on equated monthly instalments (EMIs) by another three months - till August 31, 2020

With the Reserve Bank of India (RBI) extending the moratorium on equated monthly instalments (EMIs) by another three months — till August 31, 2020 — a lot of people facing a cash crunch would be relieved.
 

Earlier, the RBI had given a three-month EMI moratorium on all term loans, due for payment on March 1, 2020. Adhil Shetty, CEO BankBazaar, says: “However if you don’t have a cash flow issue, it would be advisable to continue paying your EMIs to reduce your loan balance.”

Suresh Sadagopan, founder, Ladder 7 Financial Advisories, says: “Ideally moratorium should be avoided, but in these desperate times if you don't have the funds, you are better off taking the moratorium instead of bouncing the EMI because it will affect your credit score and report.”

According to him, such a situation will not arise if you take a moratorium. While it will make the overall loan expensive, you can still catch up with the extra payments later when things normalise. For instance, your future bonus can go towards the loan repayment. Prepayment of the loan amount in future should be taken very seriously. 

The impact: Assume you have borrowed Rs 50 lakh at 8.5 per cent interest for 20 years. The EMI would be Rs 43,391. If you have paid 12 EMIs already, and defer the next five from April to August, the total interest amount of Rs 1,72,939 would be added to your loan balance on month 18. If you fail to settle this due in September, the interest would compound over the remaining loan tenure and will be recovered from you through a longer loan tenure or bigger EMIs. Shetty adds: “The extension of loan EMIs is not a waiver on repayments and interest will continue to accrue on the principal outstanding. If you don’t pay your EMIs during the moratorium, then your outstanding will go up for that period compared to if you pay EMIs, which will reduce your outstanding principal.” There are two options that you have.

 

 

Option 1: Add the accrued interest to the outstanding principal (Rs 1,72,939 + Rs 44,06,359 = Rs 45,79,298) and continue with your existing EMIs. The revised balance becomes the basis for your new dues. The five missed EMIs, in this case, would cause your original loan tenure of 240 months to become 267 months, adding 22 extra EMIs. Hence, your original projected interest cost of Rs 54.14 lakh will become Rs 63.67 lakh — an increase of Rs 9.53 lakh for missing just five payments. Shetty says: “The ones who’ll be affected the most are those near the start of their loan tenures. This is because interest payments are front-loaded in equated monthly instalments (EMIs).” 

Option 2: Add the accrued interest to the outstanding principal (Rs 1,72,939 + Rs 44,06,359 = Rs 45,79,298) and ask the bank to increase the EMI so that the tenure remains the same. In this case, the interest accrued during the moratorium would get compounded over the tenor of the loan.

Sadagopan says: “Since the repo rate has been revised by substantial amounts (115 bps) in the last two months, EMIs would fall when banks reset loan rates, making things a little easier.” 

Existing repo-rate based customers can expect a 40bps reduction in their current interest within the next few weeks, those on MCLR may have to wait longer to see the impact of the rate cut on their loan rate.