By Dinesh Thakkar
Reserve Bank of India has extended the loan moratorium to three more months against the initial planned tenure of three months. Many people have opted for moratorium although they can pay their EMIs, just due to the announcement that opting for moratorium would not harm their credit score. Moratorium is not an EMI waiver but only deferring it. Interest will continue to accrue for six months and the tenure will get extended.
Let us say you have taken a home loan of Rs 30 lakh with a tenure of 20 years. The interest is 9% and EMI comes to Rs 26,650 per month. Now opting for moratorium, you will be saving (Rs 26,650 X 6) = Rs 1,59,900. That’s a big amount and many would be tempted but let us check how much additional interest you incur.
Now let us assume you have been paying EMIs for four years and now remaining tenure is 192 months plus six months (moratorium). Total amount to be paid would be Rs 40.50 lakh which includes Rs 30 lakh principal and Rs 8.7 lakh interest but if the moratorium is used, the additional interest burden could go up to around Rs 1.8 lakh.
I know you think I must have made a mistake. No way could six months interest be Rs 1.8 lakh for the Rs 1,59,900 you are not paying, you are thinking. But there is an EMI loan calculator which will help you know how the EMI calculation works. After we pay each month’s EMI, the amount is deducted from the loan outstanding but when we opt for the moratorium, we don’t pay EMI and interest continues to accrue and keeps getting accumulated on the outstanding principal. This increases the loan burden and also the tenure. Also, that extra Rs 1.8 lakh is not just calculated on the Rs 1,59,900 not paid but it is due to accumulation of interest and no EMI being paid of which some part could have gone towards principal repayment. So loan outstanding grows and increases loan burden and tenure extension.
Pay EMI if there is cashflow
We don’t advocate that moratorium is bad for people who have faced cashflow problems due to lockdown and can not pay their EMIs. They will find this moratorium helpful even if it comes at the cost of an increase in interest. So if you can pay EMIs without too much problem, then don’t opt for moratorium thinking you are getting some breathing space as we have shown how much additional interest accrues.
If you opt for a moratorium, ask your lender to keep the tenure the same after moratorium as that will increase your EMIs but will keep your interest cost component down. Keeping the EMI same after moratorium will increase tenure and interest. After the moratorium, if the situation permits and you have funds available, prepay either three or six pending EMIs at one go. If one prepays most of the EMIs taken via the route of moratorium, tenure and EMI will remain the same and you will have very little additional burden.
The writer is chairman & managing director, Tradebulls Securities