4 reasons why you shouldn't avail EMI moratorium if you don't need one

In light of the COVID-19 pandemic affecting our nation’s economic stability, the RBI has allowed banks to offer moratorium of three additional months. The relief measure which was initially offered from March-May, has been extended till August 2020. The moratorium facility is valid on payment of instalments for all loans, including home, car and personal loan, among others.

Moratorium is a deferment of loan repayment for a maximum period of 6 months. It is a relief measure especially for those facing financial challenges due to COVID-19 but it is advisable that those with capacity to pay continue do so every month.

Let’s understand how the moratorium works through an example. Suppose, you have an outstanding loan of
₹1 lakh with an interest of around 15% per annum and remaining tenor of 36 months and EMIs of ₹3,500. If you avail moratorium for all 6 months you may have to pay approximately ₹12,500 of additional interest as per the interest rate in the example.

1. It’s a delay and not a waiver

2. It will increase interest burden

The objective of a moratorium is to provide you relief from EMIs for a particular period, with no penal charges. It is not a concession but a deferment of EMIs to help ease liquidity issues. The RBI has also clarified that the moratorium simply indicates a shifting of the repayment schedule by up to 6 months. If you opt for moratorium, interest will continue to be charged on the outstanding amount for the months for which you avail moratorium. This capitalised interest will then be collected later in the form of extra EMIs. As a result, you will end up paying a higher interest component on your loan.

3. It will increase loan tenure

4. Longer the tenure, more the EMIs

When you opt for moratorium, the tenure of loan will also get extended along with the interest for the moratorium period. This means that you will now take a longer time to repay your loan. With a longer tenure left on your loan, the implications of moratorium will be significantly higher. This is because the loan outstanding will be more and due to the effect of compounding, the additional interest burden as a result of moratorium will be greater. This in turn means that number of additional EMIs you pay will be higher.

As you can see, while moratorium facility is extremely useful for those facing financial challenges due to COVID-19, it could increase debt in the long-term.

Therefore, if you want to avoid paying additional interest in the future, it is advisable to maintain sufficient balance in your bank account before your next the EMIs are due and also, pay deferred EMIs, if any, today!

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