Impact of availing Moratorium on your loans.

The Central Government has told the Supreme Court that it will likely come with a decision by 1st of October regarding overcharging of interest by banks on installments which were deferred during the moratorium period due to the COVID-19 pandemic. The top court asked the government to bring the decision on record and circulate an affidavit to the parties in a batch of pleas challenging interest on deferred installments.

On March 27 the Reserve Bank of India permitted all commercial banks, co-operative banks, all-India Financial Institutions, and NBFCs to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as of March 1, 2020. In May, the central bank announced the extension of the loan moratorium by 3 more months to August 31. But loan EMI will continue to accrue interest for six months and the tenure will get extended.

Assuming, you have taken a home loan of Rs 40 lakh with a tenure of 20 years at an interest of 9%.

Your EMI comes to Rs 35,989 per month.

Now opting for moratorium, you will be saving (Rs 35,989 X 6) = Rs 2,15,934.

However, it is not as simple as it looks. Other than the remaining tenure of your loan plus six months of the moratorium, the total amount payable by you includes the amount of your principal loan, the interest on the loan as well as, the additional interest accured during the moratorium period.

As per our EMI pay module, we pay EMI every month and the amount is deducted from the outstanding loan. However, when we opt for the moratorium since we are not paying the EMI, the interest continues to accrue. Additionally, it keeps getting accumulated on the outstanding principal amount. Thus your loan burden as well as the tenure increases.

Therefore it is absolutely up to you. If you have the required cash flow, it is better that you pay off your monthly EMI. However, for those hard-pressed with funds, a moratorium seems the stop-gap solution. One more benefit of opting for Moratorium is that your credit score will not be impacted by the delayed payments. If you opt for a moratorium, you may end up paying interest on interest too. We shall have to wait for the verdict of the Supreme Court decision in this regard.