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Raj Khosla, Founder and managing director, MyMoneyMantra.com
Raj Khosla, Founder and managing director, MyMoneyMantra.com

Who should opt for the bank moratorium on loans?

  • The covid-19 moratorium offered by lenders looks enticing but could add a significant burden to your interest
  • RBI has announced a moratorium for all loan payments, which fall between 1 March and 31 May 2020

In a bid to ease the lack of liquidity that borrowers might face amid the nationwide lockdown to contain the spread of the covid-19 pandemic, the Reserve Bank of India (RBI) on 27 March allowed banks and financial institutions to offer a three-month moratorium on term loans and credit card bills. During this period, borrowers can opt to not pay their equated monthly instalments (EMIs) or credit card dues. Disha Sanghvi asks four industry experts what the possible deferment of EMIs means and whether it makes sense for borrowers to opt for the moratorium

The cost of deferring the payment can be very high

The covid-19 moratorium offered by lenders looks enticing but could add a significant burden to your interest. Since this is only a grace period and not a waiver, banks will charge interest for the unpaid amount.

A lot depends on the age of the loan. New loans have a larger proportion of interest built into the EMI, accounting for 80-85%, in the first few years. This progressively reduces as the loan is paid off. So, if a new loan goes into moratorium, a higher amount will get added as interest. How this interest will be recovered depends on the banks. Some may seek a one-time payment in June, while others may extend the loan tenure or even hike the EMI after June.

Home loans charge an annual interest rate of 8-9% and personal loans 12-18%. But credit cards charge 2-4% per month for rolling over the balance. If you defer the payment for two months, the cumulative interest could add up to 4-8%.

Don’t go for the moratorium unless you’re facing a cash crunch. The cost of deferring the payment is very high, even though it will not hurt your credit history.

MRin Agarwal, Financial educator and founder-director, Finsafe India Pvt. Ltd
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MRin Agarwal, Financial educator and founder-director, Finsafe India Pvt. Ltd

Avail of it only if you are not able to pay your loan EMIs

RBI has announced a moratorium for all loan payments, which fall between 1 March and 31 May 2020. This is applicable on both the principal and the interest payments for home loans, personal loans, credit card payments and car loans.

A few points need to be noted. First, this is not an EMI holiday, but a deferment. This means EMIs need to be paid after three months and interest will continue to accrue. Second, lending institutions may decide to either give it to all the customers or only if the customer asks for it. Borrowers need to check the policy of their lenders since some are planning to give this benefit only to non-salaried customers.

Avail of the moratorium only if you are not able to pay your loan EMIs as your loan will not only get extended but there would be extra interest to be paid overall. Don’t use this benefit for credit card outstanding as the interest that would be charged in the range of 36-42% per annum, and purchases made during the next two months will also attract interest. Keep in mind that this is a postponement and not a waiver.

Navin Chandani, MD and CEO, CRIF High Mark
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Navin Chandani, MD and CEO, CRIF High Mark

Those reliant on worst-hit sectors may benefit

The moratorium has been announced to benefit both businesses as well as individual borrowers who are facing financial stress due to covid-19.

As far as businesses are concerned, companies with cash flow mismatches, disrupted supply chains and decreased demands could leverage the breather. Individual borrowers who are experiencing liquidity issues and expect financial uncertainties in the near future, especially those dependent on the sectors that are worst impacted, can use the relief to stay afloat.

If the customers avail the EMI moratorium, there will be a levy of interest at the contracted rate on the loan outstanding, for the moratorium period. This interest will also get added to the outstanding amount. Ideally, businesses and individual borrowers with good financial health and stable jobs can and should continue to repay their EMIs on time, so that they can benefit from the lowered interest rate, and not have deferment related interest accruals.

Credit bureaus work with the data reported by banks. So availing of the deferment will have no impact on your credit score.

Adhil Shetty, Chief executive officer, BankBazaar
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Adhil Shetty, Chief executive officer, BankBazaar

It can alleviate financial stress from income uncertainty

The three-month moratorium on all term loans and credit card bills would alleviate the financial stress on borrowers facing income uncertainty amid the ongoing covid-19 crisis.

While several banks have started offering the option to customers, there are a few things that you need to keep in mind before you opt for it. First, though there will be no penalties for deferring the EMIs, interest will continue to accrue on the unpaid balance. So your outstanding for that period will go up compared to if you pay your EMI. So if there’s no disruption in your cash flows and you are in a position to pay your EMIs, it is advisable to do so and reduce your loan balance.

It is also important to keep paying your credit card dues. Credit card debt is expensive. Interest on unpaid dues can pile up quickly and become a burden. Therefore, it is wise not to defer your card payments if you can continue making them on time.

Even if you opt for the moratorium, there will be no impact on your credit scores. However, make it a point to keep track of your credit score by checking it every month.

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