People usually take credit from a bank or any other financial institution. That needs to be paid back along with interest. However, sometimes a grace period is given to the borrowers by the banks during which one is not required to make any repayment. This is known as moratorium period.
However, the interest income starts getting accumulated even though your EMIs don’t start. This is a grace period offered by the banks to students while they opt for an education loan. Similarly, if an individual opts for a home loan, they can also get this grace period. The grace period is decided by the lending organisation and as per their creditability, they can give the grace period of a longer duration.
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What is moratorium period?
Moratorium period or EMI holiday period refers to a particular duration in the loan tenure when the borrower is not required to pay EMIs. This holiday period is mostly available for salaried individuals. Although the borrower is not required to pay EMIs, the loan amount would still continue to incur interest during this period.
“Interest charged during this period is added to the loan amount and will get adjusted through higher EMIs during the repayment period. However, borrowers have the choice to continue to service the interest amount during this period,” says Naveen Kukreja – CEO & Co-founder, Paisabazaar.com.
How is moratorium connected with a home loan and education loan?
Moratorium period is mostly associated with education loans where the loan repayment usually begins when students start earning after completion of a course. This feature provides a sort of financial cushion to the students as there might be a time gap between completing his course and getting a job. RBI has asked banks to provide a uniform moratorium period of 1 year (after the completion of course) in education loans.
“Moratorium period has also gained popularity with home loan borrowers in recent times. As housing companies often take a long time to deliver their projects, home loan borrowers are burdened with paying house rent and home loan EMIs simultaneously. In such situations, deferring the EMIs till receiving the possession of the house helps borrowers to maintain their daily budget,” says Kukreja.
What are the benefits, if someone tries to pay loan within the moratorium period?
As your loan amount continues to accrue interest during the moratorium period, repaying the loan amount within the moratorium period will help you reduce your interest cost.
“if you are paying your loan within the moratorium time-frame, then banks can also provide an interest concession of 1% on education loans on regular servicing of interest while studying,” says Kukreja.