Loan moratorium: Understand benefit, impact, smart borrowing tips

It helps borrowers facing financial crisis but may result in accumulated interest on loan

The Reserve Bank of India (RBI) in march 2020 introduced a moratorium on personal loans to help borrowers facing financial difficulties . Moratorium gives immediate respite from paying equated monthly installments (EMIs), but it may increase financial burden in the long run. Understanding the impact of moratorium on EMIs and interest payments is crucial for borrowers. 

 

What is a moratorium?

 

A loan moratorium is a legally approved period during which borrowers can temporarily halt their loan repayments. This arrangement does not eliminate the debt but postpones the repayment schedule, offering borrowers relief during financial difficulty. Moratorium is relevant during natural disasters, economic downturns, or personal financial crises.

 

 

Advantages of a moratorium

 

Flexible repayment options: It allows people to strategically plan their repayment schedule based on your anticipated income and expenses. This provides time to gather funds and start repayments in an organised way, easing both financial and mental pressure.

 

Support during a cash flow crunch: The primary advantage of a moratorium is deferring immediate financial obligations. This is particularly helpful during temporary income disruptions, preventing a full-blown financial crisis.

 

Late payment charges: No late payment charges will be applied to the loan during the moratorium period.

 

“There are cost implications as well. The accumulated interest is either added to the principal loan amount or spreads across future EMIs, resulting in higher monthly payments or an extended loan tenure. Therefore, before opting for a moratorium, borrowers must  assess their financial health and repayment capacity post-moratorium,” said Amit Bansal, founder, Bharatloan.

 

“A moratorium should be used in cases of unavoidable financial stress. If the borrower's income allows, continuing EMI payments ensures avoidance of additional costs and maintains a financial discipline. A moratorium must be used wisely as it’s a financial tool, not a solution,” said Vikkas Goyal, founder, Rupee112, a personal loan app.

 

Impact on credit score

 

Contrary to popular belief, opting for a moratorium does not affect credit score. The RBI has mandated that credit bureaus should not consider the moratorium period while evaluating credit reports.

 

Instead of opting for a moratorium, experts suggest:

 

Negotiating with banks for reduced EMI amounts.

 

Exploring loan restructuring options.

 

Considering balance transfer to banks offering lower interest rates.

 

Building an emergency fund to handle future financial crises.