EMI moratorium on term loans extended by 3 months: Should you opt for this option?

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Updated: May 22, 2020 5:47:18 PM

The extension of the moratorium option on all term loans by three months will provide some additional relief to countless borrowers who are currently struggling to manage their finances due to the economic fallout brought on to them by the ongoing Covid-19 crisis.

EMI moratorium on term loans, RBI extends EMI moratorium, term loans, home loan, car loan, personal loan, credit scoreWith the extension of loan moratorium facility on all term loans by three months, borrowers would get a six-month EMI holiday for dues falling between March 1, 2020, to August 31, 2020.

Are you a home loan or a car loan borrower? Here’s good news for you. In a bid to give some relief to the borrowers facing financial difficulties in times of Covid-19, the Reserve Bank of India (RBI) on Friday further extended the EMI moratorium by 3 months till August 31, 2020.

Industry experts say RBI Governor Shaktikanta Das’ latest announcement to cut the repo rate by 40 basis points to 4% and the extension of the moratorium option on all term loans by three months will provide some additional relief to countless borrowers who are currently struggling to manage their finances due to the economic fallout brought on to them by the ongoing Covid-19 crisis. The reduction in the key policy rate would translate to lower loan EMIs quickly, especially if you are currently servicing a repo rate-linked loan. If you have an MCLR-based loan, you might have to wait a bit longer to be able to enjoy lower EMIs on your loan.

“Now, with the extension of loan moratorium facility on all term loans by three months, borrowers would get a six-month EMI holiday for dues falling between March 1, 2020, to August 31, 2020. However, it will be worthwhile to re-emphasize this extension of loan EMIs is by no means a waiver on repayments as interest will continue to get accrued on the principal outstanding,” says Adhil Shetty, CEO, BankBazaar.com.

Should borrowers avail EMI moratorium?

It is clear, thus, that the extension of loan moratorium will provide relief to those facing difficulties in servicing their loans due to cashflow and income disruptions. Also, the deferment of loan repayments will neither incur penal charges nor impact their credit score.

However, “those availing the extended loan moratorium will continue to incur interest cost on their outstanding loan amount during the moratorium period. This will increase their overall interest cost. Hence, those with sufficient liquidity to service their existing loans should continue to make repayments as per their original repayment schedule. Remember that the accrued interest on availing the loan moratorium can be significantly higher in case big ticket loans like home loans and loan against property with long residual tenure and sizeable outstanding loan amount,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

Simply put, you’ll be well-advised to take the moratorium option only if you’re finding it extremely difficult to repay your loans during these six months.

On the other hand, “if you feel you cannot do without opting for the loan moratorium, you ideally need to figure out a plan to be able to prepay the interest accumulated during the moratorium soon after the moratorium ends. Opting for the moratorium could extend your loan tenure by tens of EMIs, considerably adding to your loan burden, especially if you’ve just started repaying your loan. The point being, calculate the accumulated interest before you take the moratorium, and see whether you can pay it back, in addition to your EMIs, quickly. If not, you can look for other, albeit slightly difficult, ways to raise cash like breaking your emergency fund or taking a loan from family members, so that you can repay your EMIs without moratorium support,” advises Shetty.

What should credit cardholders do?

Experts say credit cardholders should avoid availing the moratorium on their credit card dues. The finance charges on outstanding credit card bills can range anywhere from around 24-49% p.a., one of the highest among all credit facilities. Hence, credit card holders availing the 3-month moratorium extension will end up accumulating another 6-12% of their outstanding bill amount as an additional liability.

Instead, “credit cardholders unable to repay their credit card bills in entirety should convert their unpaid bill into EMIs. Such EMI conversions come with significantly lower interest rates and their tenures too can go up to 5 years. This will ensure staggered repayment of their outstanding dues in smaller tranches in the form of EMIs, as per their repayment capacity,” suggests Kukreja.

Keep checking credit score

Lastly, don’t forget to check your credit score on a monthly basis even if it’s not supposed to get hit if you take the moratorium just to ensure you’re on top of your finances. If you spot any dip, immediately get in touch with your lender and credit rating agency to rectify it quickly.

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