What Is a Loan Moratorium and When Should You Opt for It?
A moratorium is a temporary pause on the repayment of a loan offered by the lender. It gives borrowers some breathing space when they are unable to pay timely installments due to financial stress. Moratorium is mainly applied to home loans, education loans, business loans, and personal loans.
The moratorium period in a home loan is mostly misunderstood as a waiver of installments, but you should note that during this period, payments are only postponed, and not cancelled. During this period, no EMIs are due; you should keep in mind that interest on your outstanding amount will continue to accrue.
Generally, borrowers request a moratorium period during any emergency, like health-related challenges, a delay in possession of property, or a loss of income.
By getting this relief, financial institutions allow borrowers to focus on their immediate priorities without any risk of being labeled as defaulters. So, for effective loan management, understanding the moratorium period is very important.
How does the moratorium period work for any loan?
In the banking system, the moratorium period in loan is a structured process designed to ease the pressure of paying installments. It usually follows these steps.
- First, the borrower submits their moratorium request to the bank, specifying the reason for difficulty in repayment.
- Next, the bank checks eligibility based on the loan type, financial circumstances, and repayment history.
- If the request is approved, the borrower is exempted from paying installments for a specific duration, mainly ranging from 3 to 12 months.
After the end of the moratorium period, the borrower has to start repaying EMIs with revised terms.
As an example, if you have a home loan of 40 lakhs with a tenure of 20 years at a yearly interest rate of 8%, and you avail a moratorium home loan of 6 months. Then you will not pay EMIs for 6 months, but the unpaid interest of approx. 1.6 lakh (calculated on a simple interest basis) will be included in your loan amount.
So, this results in an increased EMI rate after the end of the moratorium period or extended tenure. Thus, while home loan moratorium offers temporary relief, it also increases total amount of loan.
Interest during moratorium – simple vs. compound interest
Interest during the time of moratorium is charged even when your EMIs are postponed. The way this interest is calculated has a significant impact on installment repayment.
1. Simple interest
Simple interest is calculated only on the principal amount of the loan. As an example, a loan amount of 10 lakhs at an interest rate of 10% will attract 50,000 INR during the moratorium period of 6 months.
2. Compound interest
The compound interest is charged on both principle amount and the previously accumulated interest. It means your pending loan will grow at a rapid rate, making it more expensive if the duration of the moratorium is longer.
Lenders in India generally apply compound interest which increases the burden of repayment. Borrowers are therefore suggested to make some partial payment before availing the moratorium if possible. Ratnaafin provides an efficient loan EMI calculator which effectively helps you plan your payment schedule.
Why should you opt for a moratorium period?
Moratorium period are mainly valuable during the period of financial stress. Here are some reasons why you should avail it.
Financial relief
Borrowers get some time to rearrange their income sources without any pressure to pay installments.
Cash flow management
It let redirection of funds towards priority expenses like education or healthcare.
Protection from default
By officially postponing the installment of the loan, borrowers can avoid being categorized as defaulters.
Safeguarding credit score
As the financial institution approves your moratorium period, your credit history will remain unaffected.
Flexibility
Banks may offer customized repayment options after the end of the moratorium period to ease repayment back to normal EMIs.
Conclusion
Now, I hope the loan moratorium meaning would be much clearer to you. A moratorium is generally a way to pause your EMIs to focus on your priorities, like education, health, or job search. This will not impact your CIBIL score; however, there will be a slight increase in future EMIs as the moratorium period accumulate interest rate which is added in future installments.
