Should you opt for the EMI moratorium or reject it? Let’s look at a few key factors that must be considered to make an informed decision about whether to opt for the moratorium facility or not.
The coronavirus pandemic has harmed the global economy and sparked fears of a recession. The economic fallout could involve loss of income for millions of Indians, which will make it extremely difficult for them to repay their loans. At the same time, the inability to repay their loans can worsen the NPA woes of banks which can further harm the Indian economy. So, in order to deal with this problem, the Reserve Bank of India (RBI) recently directed all banks to allow a three-month moratorium on loan EMIs and credit card payments for borrowers and credit card users so that they could better manage their short-term liquidity concerns.
Lenders have already started extending this moratorium facility to their borrowers on their loan and credit card dues falling between March 1, 2020 and May 31, 2020. However, this moratorium will work like a deferment on repayments and interest will continue to accrue during the break. Most importantly, borrowers and credit card users will have the option to either utilise this facility or continue to make regular repayments during these three months.
Now, the question arises, should you opt for the moratorium or reject it? Let’s look at a few key factors that must be considered to make an informed decision about whether to opt for the moratorium facility or not.
1. Remaining tenure of the loan
Your loan interest is front-loaded. At the start of your loan, a larger portion of your EMIs goes towards interest. For example, if you borrowed Rs 30 lakh for 20 years at 8%, your EMI will be Rs 25,093. In your first EMI, Rs 20,000 will go towards interest while only Rs 5093 will be your principal payment. The share of principal payments increases with each payment. Therefore, if you are taking the moratorium near the start of your loan, you’ll need to take stock of the additional dues that will need to be paid. The interest accrued during the moratorium will be added to your outstanding loan, that is assuming you can’t pay it upfront in June.
So, since your dues increase during the moratorium, your EMI or your loan tenure will increase. The further you are from the end of your loan tenure, the more your additional dues will compound. A single missed EMI and your inability to pay it now could add several more EMIs to your loan, and you’ll need to repay a much bigger amount over the course of your loan. To avoid the steep compounding of interest on unpaid dues, consider making pre-payments at the earliest. Pre-payments, especially near the start of your loan, will shave off many months off your tenure and could potentially save you lakhs of rupees on large loans. Conversely, if you’re nearing the end of your loan, taking the moratorium will not cost you too much.
2. Interest on the loan
Interest rates differ across loan categories. For example, the interest rates range between 7.25% and 8.5% p.a on a home loan, while they are around 9% to 10% on a car loan, and so on. Usually, the interest rates on secured loans are lower than on unsecured loans. For example, on a personal loan, the interest rate can be as high as 18% to 24% p.a. Banks are also allowing moratorium on credit card dues, on which the annualised interest rate could be higher than 48% p.a. The point being, unless you are under extreme financial stress, avoid the moratorium especially on high-interest loans or credit card dues.
3. Immediate liquidity requirement
Liquidity requirements should not be the only reason to opt for the moratorium. Before choosing for the moratorium, you may try borrowing from sources like friends and family members for a short duration, provided they are financially strong. Use that money to repay your EMIs and later repay them when your cash-flow stabilises. You may also explore options like liquidating some of your investments or use a portion of your emergency fund to overcome the crunch. If you have already exhausted all the possibilities to arrange the required funds, you may consider the moratorium option carefully.
In conclusion, accepting the offered loan moratorium facility without thinking it through could lead to bigger financial complications in the future. More importantly, this moratorium by no means is a loan waiver. Repaying your loans is a legal and moral obligation, and this moratorium doesn’t change that a bit. So, if your cashflow hasn’t changed much in these months, you should ideally try to clear your dues without the help of the moratorium, especially when it comes to high interest-charging debt. And in case you don’t have any other option, ensure you have a plan to repay all your dues, including any additional interest charges, soon after the moratorium ends.
(The author is CEO, BankBazaar.com)