If you are facing severe cash crunch due to the covid-19 impact on your life and finances, you can skip paying your equated monthly instalments (EMIs) till August but remember that availing of the facility will come to bite you in the long term.
The Reserve Bank of India (RBI) on Friday extended the loan moratorium period by another three months to 31 August. The central bank, in March, had provided a moratorium on all term loans due between 1 March and 31 May 2020.
Before you opt for the moratorium, remember that it can give you short-term relief but can cost you dear in the long term. This is because, during the period of moratorium, interest will continue to be levied on the outstanding loan.
Once the moratorium period get over, the interest accrued during the period will get added to the principal outstanding and, hence, increase the overall loan amount. For instance, suppose you have an outstanding home loan of ₹30 lakh and the current interest rate is of 8.5% per annum. If you plan to avail the moratorium and skip paying your EMI for the next three months—June to August—the interest for these three months will come to approximately ₹63,750, which will get added to your original outstanding principal of ₹30 lakh and interest will be charged on it throughout the remaining tenure of the loan.
“The three months extension of the moratorium will be welcomed by borrowers struggling with liquidity problem," said Adhil Shetty, CEO and co-founder, BankBazaar.com, an online marketplace for financial instruments. “While it is expected that there will be no credit score impact, borrowers should continue to do their monthly checks to be aware of their standing. Borrowers must also understand how the added interest impacts them and be prepared with cash in hand over the next year to pre-pay their dues to bounce back from the additional debt," added Shetty.
After the moratorium period, you will have two options—to pay the same EMI with an increase in tenure or pay an increased EMI over the same tenure.
The cost of taking the moratorium benefit will depend on your remaining loan tenure, the rate of interest and the loan amount. The higher the rate of interest, the higher will be your cost of moratorium. Similarly, the longer the tenure left, the more will be the moratorium burden. Therefore, go for it, only if you are facing severe financial crunch.