Should you opt for the Personal Loan Moratorium? Read this before you decide

The COVID-19 pandemic and resulting initiatives such as lockdowns across the world have impacted the livelihood of millions globally as well as in India. As a result, many borrowers in India have witnessed a sharp decline in their income making it difficult if not impossible for them to keep making timely loan repayments. To provide relief to such borrowers, India’s Central Bank, the Reserve Bank of India (RBI) initially introduced a 3-month moratorium on term loan repayments for the March to May period. This was subsequently extended for a further 3 months in May for the June to August period. But this is a temporary relief, so to make an informed decision you should consider the following key aspects of RBI loan repayment moratorium.

Applicability of the Moratorium

RBI’s moratorium guidelines specify that it applies to borrowers of all term loans such as home loan, personal loan, car loan, etc. that were sanctioned before 1^st April 2020. So if you have already applied for and been approved for the moratorium in March, you can potentially not make any EMI payments for up to 6 months starting on 1^st March 2020 and ending on 31^st August 2020. After the end of this period, you will, however, have to resume the normal monthly EMI payments once again.  

What’s more, you can apply for the moratorium even if you have multiple loans outstanding with the same lender or with different lenders. But do keep in mind that while you are free to apply for this facility, it is at the discretion of the lender to actually grant this request. For example, some lenders have put in place the criteria that an applicant’s loan account needs to be up to date i.e. no missed payments/defaults till 29^th February 2020 to qualify for the moratorium.      

Moratorium Impact on Credit Score

RBI has specifically stated that any EMI payments missed during the moratorium period will have no impact on your credit score provided the lender has approved your moratorium request. Lenders too have confirmed that they will not be reporting missed payments as defaults during the moratorium to credit bureaus and also no late payment fees or penal interest on overdue amounts will be charged during the approved moratorium period.

The Interest Accrual Consideration

While not having to make EMI payments during a cash crunch is a good thing, there is an interest accrual cost that you need to consider. During the moratorium period, interest will continue to accrue on your outstanding personal loan principal at the start of your moratorium period. You can find your outstanding loan principal in your latest personal loan account statement. Alternately, you can use a free personal loan EMI calculator that shows your outstanding principal amount based on your originally sanctioned loan amount, loan start date, and interest rate. Let’s understand how the interest accrual calculation works with an example:

Let’s assume your loan principal outstanding at the start of the moratorium is Rs. 1 lakh and your loan interest rate is 12% p.a. Also, suppose you have availed the full 6-month moratorium.

Based on the above assumption, the monthly nominal rate of interest = 12%/12 months = 1% per month i.e. 1/100 per month Interest for the 1^st month of moratorium
= 100,000 x 1/100 = Rs. 1000
Total Interest accrued for 2 months of moratorium = (100,000 + 1,000) x 1/100 + 1,000= Rs. 2010. The principal outstanding is increased by the interest accrued in the previous month, hence principal loan outstanding for the second month is Rs. 1 lakh + Rs. 1,000 (interest for the first month)

By using the same calculation, you will get the following figures:

Thus in our illustration, you will end up paying an extra Rs. 6,152 as interest accrued for the moratorium period of 6 months. Obviously, if your outstanding loan amount or interest rate is higher, the interest pay-out will also be higher. So, while the personal loan moratorium may not cost you in terms of late fees or penal interest charges, you will have to incur the extra interest cost as shown above.

The Best Course of Action

Many experts have already said this, but it does hold – “Apply for the personal loan moratorium only if you have no choice. If you do not have cash flow issues, stick to your repayment schedule like before”. This advice is practical as every borrower’s situation is unique. Some may be less impacted by the COVID-19 crisis than others and in such a case it does not make sense to pay the extra interest by opting for the moratorium. On the other hand, if you now lack the means to continue paying your loan EMI every month right now, the moratorium will give your much-needed relief as well as some time to try and sort your current financial issues, albeit at the cost of accrued interest.  

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