What do you do if you are facing a lack of funds and don’t have collateral? Yes, the time-tested step here is to take a personal loan. But there’s a catch!
Personal loans typically have high interest rates. And as soon as you get the loan money, you have to start making monthly payments. This can make it tough to manage your expenses despite taking a loan, as the loan itself becomes a large liability!
This is where the concept of the Moratorium Period in personal loans comes in. The moratorium period on loans is a temporary break from paying installments. It can help you tide over a serious financial crisis. In fact, this concept was introduced in India to bring financial stability during COVID-19 lockdowns. However, the interest during the break gets accrued and raises the principal after the moratorium!
So, what exactly is this double-edged sword, and when can you use it safely? We will address these questions in detail in this blog. Let’s begin!
What is a Moratorium Period in a Personal Loan?
A moratorium period in a personal loan is the time period of a loan tenure during which no interest must be paid by the borrower. It is the amount of time you are allowed to wait before you have to start paying the loan back in equal monthly payments.
The loan’s interest will be calculated using simple interest during this time. And the interest amounts will be added to the principal for the new payment schedule and tenure after the moratorium.
How Does a Moratorium on Loan Work?
The Reserve Bank of India allows 6-month moratoriums on personal loans and term loans, during which a borrower may not make any payments. The move to legalize moratoria was taken by the RBI in 2020 in response to the income uncertainty caused by COVID-19.
During the moratorium, the lender computes the loan’s interest for this period by applying simple interest to the offered amount. The interest charged on your loan during the moratorium will be added to the principal amount. After this EMI holiday is over, you must pay your EMIs on the net amount. This amount includes the accumulated interest and the principal amount.
Let’s take an example of a loan amount of Rs 1 lakh released with an interest rate of 11% per annum and a 2-year moratorium. In this case, a total interest of Rs 11,000 per annum will be accumulated for two years, creating a total sum of Rs 1,22,000 at the end of the moratorium. The interest and EMIs will be calculated on the basis of this amount, not the original 1 lakh.
Benefits of Opting for a Loan Moratorium
A loan moratorium offers you a break before you must start paying the EMIs on your personal loan. This makes it perfect if you are currently undergoing financial hardships but need money for a major expense of any type. However, the total amount outstanding will be higher at the end of this break. So, you should be able to pay the larger EMIs eventually.
Let’s have a look at the key benefits of a moratorium in further detail:
- Flexible repayment plan
A loan moratorium helps you plan your repayment in a strategic manner as per your expected income and expenses. It can help you accumulate funds and begin repayment in a planned manner. This alleviates financial and mental stress.
- No negative impacts on borrowing capacity
A loan moratorium will not impact your credit score or future borrowing capacity negatively. But you should be able to pay the eventual instalments on time to avoid such negative effects.
- Helps during a liquidity crisis
The most important benefit of a moratorium is that it delays your financial liabilities. So, a temporary loss in income won’t put you in a financial crisis.
Drawbacks of Loan Moratoriums on Loans
A loan moratorium also has some major limitations and precautions. Here are the main drawbacks of moratoria on personal loans:
- No waivers
An EMI holiday does not lower your liabilities. Instead, it adds up the interest from the break period and increases the total principal. It only helps you temporarily by deferring the installments to a later date.
- Increased loan tenure
The EMI break is temporary and ultimately increases the tenure of your loan. This can lead to a lot of debt in the long run and throw off your plans for the future.
- The sudden burden of payments
The short-term respite from the skipped EMIs ends suddenly when the loan’s moratorium ends. The backlog of interest adds to the burden of heavy payments. And this can land you in serious financial trouble unless you have made perfect plans in advance.
Frequently Asked Questions About the Moratorium Period
If you still have any doubts about personal loan moratoria, check out these answers to common questions:
- Will the bank charge late payment charges for the moratorium facility?
No. Late payment charges will not be levied on the loan during a moratorium.
- Which lenders can offer moratorium periods in India?
Moratorium periods can be offered by any commercial bank, cooperative bank, or non-banking financial company.
- Will EMI deferring impact my credit score negatively?
No. EMI moratoria will not affect the credit score in any direct manner.
- Does a moratorium include both the principal and interest amount?
Yes, a moratorium includes the interest as well as the principal component of the EMIs.
- Are credit card payments covered under moratoriums?
No. Credit cards come under a revolving credit type. Hence, they are not covered under moratoria.
- Can I cancel my loan’s moratorium period?
Yes. You can easily cancel your EMI moratorium by contacting your bank to start the cancellation process.
- Are interests during a moratorium waived?No. The moratorium period on loans is a temporary break from paying installments, but interest during that period accrues and gets added to the principal.
The bottom line
A moratorium is your best option if you are seeking temporary relief from financial pressures. But you must make and carry out plans to get money and make payments on time after the moratorium ends.
Moreover, moratorium loans may require higher payments than a normal personal loan as the interest during the break is accrued. So, you should go for them only if you are temporarily facing serious financial hardships and have robust plans to bounce back in the future!
Are you ready to opt for a moratorium period on your personal loan? You can approach any Indian financial institution and apply as per their procedures. However, the moratorium system can be risky if you don’t plan your finances perfectly. So, you should always prefer an experienced and trustworthy bank or NBFC. An example is Piramal Finance, which helps you get the best moratorium loans with expert help.