What is a Moratorium Period in Loans and How It Works

You might wonder what is moratorium when looking at loan terms. It’s simply a pause on your EMI payments for a limited time. During this break, you don’t need to repay the loan, and there’s usually no penalty. It’s a helpful option built into many loans to give you some breathing space when needed.

Keep reading to learn more about what is moratorium period and how it works.

Moratorium Period Meaning

Lenders define moratorium period meaning as a legally allowed break from repayment. It can be offered at the start of your loan or later in case of genuine financial stress. It’s a facility lenders offer when you’re unable to pay EMIs due to reasons like job loss, health issues or cash flow crunch. 

It’s not automatic. You need to request it and your lender must approve it. But even though your EMIs are on pause, interest still adds up. Once the period ends, you must start regular EMIs again based on a revised schedule. Once the moratorium ends, your EMIs or tenure may increase to adjust for the missed payments.

How Does a Moratorium Period Work?

When the lender approves your request for a moratorium, they will halt your EMI payments. However, interest will still be levied and added to your total outstanding amount. Once the period ends, your lender will give you a new schedule as your outstanding amount will change. This leads to an increase in your EMI, your tenure or both, depending on the agreed plan.

You might also hear the term grace period, but it’s different from a moratorium. A grace period gives you a short window, usually up to 15 days after your EMI due date. Within this grace period, you can pay without a penalty. A moratorium, on the other hand, offers a longer break. 

What is an Example of a Moratorium Period?

Let’s say you have a personal loan of ₹2 lakhs at 12% interest for 2 years. You’ve already paid 6 EMIs. Due to job loss, you opt for a 3-month moratorium. Here’s what happens:

• Interest keeps adding up for those 3 months
• Your outstanding loan amount increases
• Your lender either extends the tenure or revises your EMI

So, you skip EMIs for a short time, giving you breathing room. But your overall loan cost goes up.

How Do Lenders Calculate Interest During the Moratorium Period?

Continuing with the earlier example, let’s assume you have a personal loan of ₹2 lakhs at 12% annual interest for a tenure of 2 years. Now, due to a temporary income pause due to a job loss, you opt for a 3-month moratorium.

During this period, your EMIs are on hold. But interest keeps adding up on the pending principal.

Here’s what happens:

• Monthly interest: ₹2,00,000 × 12% ÷ 12 = ₹2,000
• Total interest for 3 months moratorium: ₹2,000 × 3 = ₹6,000

This ₹6,000 gets added to your outstanding loan amount. Once the moratorium ends, your lender may either increase your EMI, extend the tenure or adjust both. This ideally depends on the repayment plan you choose.

Advantages and Disadvantages of the Moratorium Period in a Loan

There are some benefits you can enjoy by opting for a moratorium period in a personal loan or any other loan. In addition to these advantages, there are also some drawbacks that you may have to face. 

Advantages	Disadvantages
Helps you avoid default when facing a crisis	Total interest payout increases
Gives you time to stabilise your finances	You may need to pay higher EMIs after
No impact on your credit score	Your loan tenure may get longer
No penalty charges during the break	Not available automatically, you must apply

Armed with this information about the provision and its pros and cons, decide if this option is worth it. One way to minimise the burden of repayment is to avail a loan on affordable terms. The Fibe Instant Cash Loan is one such option and you can get up to ₹5 lakhs at affordable rates.
Moreover, you enjoy flexible tenures and zero foreclosure charges, allowing you to have a comfortable experience. Download our Personal Loan App or apply on our website to get started!

FAQs on the Moratorium Period 

How is interest calculated during the moratorium period?

Lenders compute interest during this period using the simple interest formula. This interest is levied on the outstanding amount for the period and not the entire principal amount. This amount is then added to the payable amount, increasing the number of EMIs or the EMI amount. 

What is the moratorium period for personal loans?

It is the period during which you don’t have to pay instalments and its length depends on the agreement between the lender and the borrower. 

How much will the EMI increase after the moratorium?

It depends on how long the moratorium period was and the interest applied during it. 

Can I pay EMI during the moratorium period?

No, you don’t have to pay any EMIs during a moratorium period on personal loan or any other loan.