Home / Money / Personal Finance /  Opinion | Why you should keep paying EMIs

There is always fine print when regulators make statements. When the Reserve Bank of India (RBI) announced a moratorium on loan repayments (home, car, personal, credit cards), there was a widespread belief that these were waived and people won’t have to pay three months’ worth of their EMIs. This is wrong on two counts. One, the moratorium is for three months starting 1 March and ending 31 May 2020. The announcement came on 27 March, by when most EMIs for the month are already paid, so in effect the grace period is technically just two months. Two, RBI has not given a waiver or a concession on our loans, but a moratorium. It is that period of time when a borrower is not required to pay his dues, but it does not mean that there’s a waiver of a loan. It is a good idea not to take this largesse if you are not strapped for cash, because the interest will get added to your loan outstanding and you will end up paying more.

Let’s unpack this. If your home loan EMI was 25,000 and you don’t pay, this gets added to the principal and the next month your interest will be on the loan outstanding plus 25,000, and so on for the number of months you don’t pay. RBI has left it for each bank to work out if it will give this moratorium and what the repayment schedule is likely to be. The worst hit will be people who don’t pay their credit card dues. Remember that a credit card is an unsecured loan. A home loan has the home itself as the collateral and the car loan has the car as something the bank can claim if you default. A credit card is a loan for about 50 days without any object that the bank can claim. For such an unsecured loan, banks charge a high rate of interest—between 24% and 40% a year. You don’t pay your credit card bill on time for two months and you are looking at a very large payback amount two months later. Please pay all your EMIs and loans if you are able to. This facility is meant for those who have a cash flow problem and most salaried employees will not. Get in touch with your bank and tell them that you do not want this facility and will continue to pay your usual dues.

What if you have a cash flow problem? Find the cash to pay back your dues from your emergency fund. See what other assets you can liquidate without a big haircut at this stage. Sell some gold ETFs. Consider taking a non-refundable advance from your EPF corpus (read more: bit.ly/3bvHCs2). Break your fixed deposits (FDs). Liquidate your debt funds. At this stage, other than equity, go down the asset list in the order listed and pay back your loans. With the FD rates set to fall, it is indeed a bad time to break your higher-interest FDs at this moment, but an emergency like the one we are going through will need decisions that we’d never take in saner times.

What if you really don’t have the money? Hold off on paying the lowest interest loans, but pay up those with a high rate. Credit cards, personal loans, car loans and home loans—that’s the order of the loans that need to be paid first. Whether the bank will charge a penalty on the non-payment has been left to the bank to decide. What you do get is a cash flow relief for two months and no scar on your credit rating score.

Not only does paying your EMI make for a good financial reason, it is also the responsible thing to do, because people who have taken a hit on their net worth rather than their livelihood should certainly not stop their EMIs.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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