The Reserve Bank of India recently announced a prolongation of the three-month Moratorium offered to borrowers in response to the uncertainty caused by the outbreak of Covid-19. At first, the RBI announced the Moratorium in March 2020 until May 2020. With the extension, the borrower’s cancan defer payment of their loan EMIs and credit card charges for a further three months, from June 2020 until August 2020.
At first glance, the Moratorium is portrayed as a massive relief for borrowers, alleviating their financial burdens during these turbulent times. However, before you jump in and decide to take advantage of the extension of three months, take a moment to think about the benefits and drawbacks of the Moratorium for your financial situation.
In our blog, we assist you in analyzing the financial implications of the Moratorium for six months to help you decide which is the best option for you.
The impact of a six-month moratorium on the financial situation of a person
With the extension of three months, the borrowers can now end their term loan EMIs for six months, from March until August 2020. Deferring EMIs will not affect any borrower’s rating on credit or be subject to late payment penalties and other charges.
However, borrowers need to be aware that the Moratorium can lead to negative financial consequences for both the short and long term. In the short term, those who choose to take the Moratorium will only be able to obtain new loans later.
In the long run, suspending the Moratorium can result in a more significant debt burden for borrowers. It is important to stress how the extension on loan EMIs delays EMI payments for a brief period. The loan will continue to accrue interest on the outstanding principal.
Three options regarding how to deal with your loans if you decide to go with the Moratorium:
- The borrower can pay accrued interest over six months (from March through August) in one payment. This allows you to continue to pay your previous EMI following the expiration period of the Moratorium.
- Alternatively, the accrued interest could be added to the principal. This will increase your EMI for the remainder of the loan.
- In the end, the interest accrued could be added to the principal amount remaining. However, the borrower has the option of keeping the EMI unaltered while also extending the remaining time.
The amount of additional EMIs and the tenure extension is contingent on the interest rate and the remaining term.
Let us talk about the consequences of a moratorium by using an illustration. Suppose a borrower took out a home loan of Rs. 30 lakhs at 9.5 percent per year for 20 years. The EMI amounts to 28,000. 28,000.
When availing of this moratorium option, a borrower will not make EMIs for six months. In this scenario, the borrower relies on the loan installment of 28,000 times 6 =. 1,68,000. The borrower decides to maintain the EMI unaltered by extending the duration. The loan is extended for four more years. Additionally, there is an added interest charge of Rs. 11.4 lakhs. This is an enormous increase in the burden of loans.
As you can see, if you opt for a suspension, the borrower is increasing the loan burden. That is why financial experts strongly advise borrowers to continue paying their EMIs at all times, except for emergencies.
Now, let us address some common questions that borrowers ask about the effect on their financials.
Can a decision to go with the Moratorium affect a lender’s score on credit?
A moratorium decision does not affect your credit score in any way. This means that your lender will not inform the credit bureaus, and the credit bureaus will not classify your loan as an NPA (Non-Performing Asset).
Applying the Moratorium may affect your borrowing options in the months ahead. Most lenders will likely be more cautious when they approve loans to those who have taken advantage of the Moratorium. Be aware that this is only a temporary impact. It could affect your borrowing capacity in the coming three to 12 months.
The borrower will likely need more confidence in your ability to repay a loan over a long period if a delay of two months causes your payments to fall off track. The borrower who chooses to go into the Moratorium could not prove their capacity to take out future loans.
I have benefited from these three months of Moratorium. However, my cash flow issues are now resolved. What is the most effective method to do this?
One of the primary reasons that many borrowers went for the first three-month time-out (Moratorium 1.0) is due to lockdown restrictions and general uncertainty. As lockdown restrictions eased and relaxations were announced, most people are into work.
If you do not have any urgent cash flow problems, the best choice is not to extend the three months to the Moratorium (Moratorium 2.0).
I did not take advantage of this three-month moratorium. Should I apply for an extension right now?
Be aware that a decision to opt for the Moratorium has the cost of financial costs. If you are having cash flow issues or are anticipating financial problems in the coming months, it is sensible to choose the three-month extension of the Moratorium. The moratorium option is more beneficial than committing to default on loan EMIs. It is best to keep paying your EMIs without urgent cash flow issues rather than taking the Moratorium.
Be aware that the pause of six months is to pay EMIs, not the interest you charge on loans.
Will the decision to opt for the Moratorium affect my creditworthiness?
Yes. If you have selected the six-month suspension and chosen to pay it off, your EMIs will be suspended for five to six months, according to the date you signed up.
Most banks are not willing the EMI-based loan for at least 12 months. Furthermore, you will be required to pay EMIs at least six months after the moratorium period to boost your creditworthiness.
What alternatives are for borrowers other than choosing the Moratorium?
If you own your own business, you can can contact your bank to find out whether you are eligible for ECLGS. ECLGS (Emergency et al. Scheme) seeks to provide financial aid to qualified MSMEs during this epidemic. Instead of temporarily putting off your EMIs, you can apply for this program to manage your company’s cash flow.
If you are a person who borrows, Try paying the loan’s EMIs with alternative methods like your savings or borrowing from your family and friends or seeking financial aid from your employer, etc.
Choose to apply for your Moratorium only after an in-depth Review of your financial situation.
Prolonging the term loan moratorium for an additional three months will be an enormous relief for many borrowers, particularly those struggling with an economic crisis due to the economic consequences of the Covid-19 crisis.
However, choosing the Moratorium can have negative financial consequences in the long run. Therefore, think about all elements of the Moratorium prior to you deciding to go with it.