Buying a house is something everyone dreams of. To fulfil your dream, a home loan is a right approach. However, paying off home loans can put you in distress. The reasons could be high interest rates, inconvenient EMIs, a lack of cooperation from the bank, or not having enough time to plan your finances.
In such a scenario, banks allow a moratorium period for loan applicants. The moratorium period in home loans reduces the burden of repaying the home loan interest after applying. There are many benefits and some downsides to a moratorium period.
In this article, you will learn about the moratorium loan meaning.
What is a moratorium period?
A moratorium period is a time gap given to you by the banks just after you get your home loan. Here, you don’t have to pay any interest or any instalment to the bank. Banks provide this period as a break to help you plan your finances. Sometimes, you might not figure out a way to repay the loan interest the very next day. In that case, the moratorium period in a home loan acts as a great facilitator and provides you with the space you need to plan your budget.
A moratorium period applies only to education loans and home loans. For that reason, a moratorium period is also known as an “EMI holiday.” While the loan is in effect, you don’t need to worry about paying the interest.
However, you should be aware that you are not exempt from paying interest during the moratorium period. The interest amount adds up to your principal amount, and you have to pay the whole interest once your break is over. The number of days that your bank allows you depends on many factors.
What are the Benefits of a Moratorium Period?
Now that you have understood the moratorium loan meaning, it is important to know about its benefits.
There are several benefits of a moratorium period in a home loan:
- Planning your repayment process:
Since a moratorium period is a temporary break from repaying the loan, you have ample time to plan your repayment process. This is a good time to make an outline and start repaying your instalments. You will also get enough time to restructure your budget. This will ensure that you have enough for your expenses even after paying the monthly instalment.
- Overcoming a crisis:
In situations where you have a liquidity crisis and you cannot manage your finances on time, a moratorium period can help you out. For the period when you have financial distress, you can ask for a temporary break from your bank. As soon as the distress phase gets over, you can start repaying your loan in an orderly manner.
This is especially applicable in the situations that we all faced during COVID-19. During that phase, economic activities were compromised, and as a result, there was a huge liquidity crisis. In tough times like these, a moratorium period can give you a break and help you plan.
- Repaying becomes easy:
As repaying becomes easy and convenient after a moratorium period in a home loan, you shed all the extra burden of the loan. You can use a moratorium period to accumulate funds from different sources and make sure that you have enough to restart your repayment. Taking a moratorium period at the start of a home loan can help you pay your instalments on time.
- No negative impact on your credit score:
One of the best advantages of a moratorium period is that you don’t need to worry about your credit score. Your credit score is not affected by accumulating interest rates. This is a temporary break.
Now that we’ve discussed the advantages of opting for a moratorium period, let’s look at the disadvantages of doing so.
What are the downsides of applying for a moratorium period?
Unfortunately, there are some downsides to a moratorium period as well:
- Burdens your interest amount:
The most visible disadvantage of going for a moratorium period is that it burdens you with heavy payments. Your interest rate is still applicable during this temporary break. So you get a sudden increase in your instalment amount. If you have not planned for this situation, it might add some financial distress to your budget.
2. Interest rate keeps adding up:
You don’t get a waiver from the interest rate during a moratorium period on a home loan. Even if you have some free time where you don’t have to worry about repaying, your interest rate keeps adding to your principal. So, you still owe the bank the interest rate during this phase.
3. Extra interest charges:
Sometimes your lender will deny you the option of paying the due interest rate without penalty. In some cases, your lender charges you an extra penalty. This is in the form of interest rates on your principal amount. You will have to repay your loan once your vacation is over.
4. Longevity of the tenure of repayment:
You have taken a break from repaying but are not exempt from the addition of the interest rate. So your principal amount increases, as does your loan tenure. Your tenure increases as your interest rate continue to rise, regardless of the moratorium period. For instance, if you took a loan for 5 years, after a moratorium period, this tenure could add up to 6 or 7 years.
A moratorium period is a special feature that gives you the space you need to restructure your budget. There are both benefits and downsides to a moratorium period, and it depends more on your assessment. There are many finance-related queries that we all have. Piramal Finance provides the best solutions to all finance-related topics.