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Ever since the start of the Covid-19 pandemic, loan moratoriums have been widely discussed in India. The country’s central bank offered a moratorium on all term loans for initially a three-month period, which was later extended to three more months, from March 2020 to August 2020, to provide temporary relief to borrowers amid pandemic-induced economic slowdown.
Here’s what you need to know about loan moratoriums and how they fare for borrowers.
What is a Loan Moratorium?
A loan moratorium is a legally authorized period that delays the payment of money due on account of specific loan instalments. The way it works is simple:
- The standard loan practice is repaying your loan as soon as it is granted.
- A moratorium period delays this repayment and allows the borrower a grace period before they can start repaying the loan via fixed monthly payments (EMIs).
- With borrowers not having to start repaying their loan as soon as it gets disbursed, they can avail what’s known as an EMI holiday and begin paying EMIs after a break.
Who is Eligible for a Loan Moratorium?
While loan moratoriums are available on all sorts of loans including home loans, personal loans, education loans and credit card dues, students are most likely to make use of moratoriums. As there might be a gap of many months or years between students completing their educational programs and getting a job, most student loans have a default provision for a repayment holiday or a moratorium.
Besides student loans, home loans are most likely to have a moratorium provision since they are big-ticket sums and borrowers may need time to get their financial affairs in order before commencing the process of repayment.
What are the Benefits of a Loan Moratorium?
Better repayment plan:
A loan moratorium can help a borrower to plan their repayment strategy in a stress-free way. It can also help them accumulate funds from different sources and begin the repayment in an orderly manner instead of rushing to pay without proper finances. Loan moratorium periods can be utilized to plan for monthly income and expenditure and it can help borrowers to save for future EMIs and miscellaneous expenses.
No negative impact on credit score:
One of the most important benefits of a loan moratorium is that it doesn’t impact your credit score negatively. Simply put, the non-payment of loans through regular instalments does not impact a borrower’s credit score in an adverse manner. Hence, a moratorium period has no impact on your borrowing capacity.
Helps during a liquidity crisis:
The Covid-19 pandemic has been a stark reminder of how devastating the impact of one event can be on the global economy. Scores of people have had their savings wiped out due to loss of jobs or the death of the family’s main income-earning member. Hence, a cash crunch or liquidity crisis is a real situation for many.
A loan moratorium can be helpful in such a situation as it can help you to tide over a difficult financial crisis. This is especially helpful for those who are facing lower salaries or those who work in the unorganized sector or small businesses that have faced a severe dent in their profits during the pandemic. The temporary break in repayment of a loan can help individuals in distress to take stock of their financial situation and plan for a better future.
What are the Drawbacks of a Loan Moratorium?
No interest waiver:
One of the biggest drawbacks of a loan moratorium is that a loan repayment is not waived, instead it is only deferred. This means that as a borrower you still owe interest to your bank or your lender. Moratoriums can also result in additional interest charges that can lead to further pressure on your future payments.
Sudden burden:
While a temporary break from loan repayment offers short-term respite, the fact of the matter is that the backlog of interest eventually catches up with you. And if you haven’t planned ahead, the sudden burden of heavy payments can derail your monthly budget and disturb cash flow arrangements.
Increase in loan tenure:
Longer periods of EMI breaks automatically lead to longer loan tenures. For example, if you avail a moratorium on a loan that was to be repaid in three years, the repayment period will now be stretched to four or five years. This can negatively affect your long-term financial goals and derail plans of debt-free financial stability.
Bottom Line
A moratorium can be a real advantage for those who are seeking temporary relief from financial hardships and have serious issues with cash flow. However, a moratorium must be entered into with an intention of discipline when it comes to repayments after the end of the moratorium period. Only those with serious financial needs and the means to make repayments should opt for loan moratoriums.
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Ranvir SinghContributor
Ranvir Singh is the founder and managing director of Kissht, a consumer fintech company. He holds a Bachelor's of Technology degree with a specialization in mechanical engineering from IIT, Mumbai and master of business administration degree from IIM, Bangalore. In the past, he has worked with McKinsey and Company as an Associate Partner for over eight years. He is among the founding members of The Fintech Association for Consumer Empowerment (FACE).
Armaan JoshiEditor
Armaan is the India Lead Editor for Forbes Advisor. He has more than a decade’s experience working with media and publishing companies to help them build expert-led content and establish editorial teams. At Forbes Advisor, he is determined to help readers declutter complex financial jargons and do his bit for India's financial literacy.
