When you take a loan, it is an act of tremendous responsibility. As a generation, people do not mind taking loans for various things – from vacations, to meet personal emergencies, marriage, to meet uninsured medical expenses, etc. This is apart from the traditional loans like a car loan, educational loan, Home loans, and mortgages.

Taking a loan is the easy part. However, repaying the debt is of crucial importance as failure to do so not only hits your credit score and thus becomes difficult to apply for additional loans but also a social stigma. The pandemic has left lakhs of people without jobs and thereby no regular income. The Government of India took various measures to lessen the impact of such unforeseen mishaps and one of them was the loan moratorium measure for individuals who were hit by the pandemic.

The rationale behind giving the loan moratorium was to lessen the debt burden of borrowers who were severely impacted. However, it is not a Loan SURRENDER, but a PAUSE, to your existing EMI payments for only 3 months.

A moratorium allows the borrower to POSTPONE paying the EMI for a few months, it is like a life jacket to save you from drowning till you reach the shore.

The Moratorium if this is agreed upon by the lender and the borrower, it has some advantages. The lender KNOWS that you will not be making – say 3 payments – so there is no panic from his side. The borrower is not worried about pesky phone calls, or a downgrade by his credit rating agency, and gives him/her some breathing space. During the pandemic everybody got a moratorium by default.

However, it has its disadvantages too. The interest for the period will still be borne by the borrower. He just got time – NOT AN INTEREST WAIVER – for the period that he did not pay. Suddenly at the end of the moratorium period, he has to pay a bigger amount as an EMI or have the tenor of the loan extended.  Both these options mean that the borrower will be paying a higher interest.

As the interest accrual will increase their total cost, existing borrowers capable of paying their loans should continue with their original repayment schedule. This will save them from incurring higher interest costs on their loans.

For example, an amount of  28.86 lacs loan post moratorium will became Rs 32 lacs. (OTR the customer’s penal & bounce charges and interest overdue and interest for the moratorium period were capitalized), while his EMI  will increase by Rs 2773/- per month.

However, If part payment or advance EMI is paid during the moratorium period, the payment can be adjusted to the total loan amount, thus reducing the burden when the moratorium period is over. Speak to your loan officer to get more information.

Hence, only borrowers unable to service their loans because of restrained cash flows should opt for the loan moratorium.

Many borrowers did not understand that the Moratorium was not the proverbial free lunch that all of us keep looking for. For a responsible borrower, she should do the following

1. Borrow responsibly
2. Be comfortable with the EMI
3. Use the Moratorium carefully, by understanding the full implication
4. Be regular in repayment – or risk your Credit score degradation.

Before opting for a Moratorium – for whatever reasons – also consider selling off of some assets to repay the loan. If you have some life insurance policy, some mutual funds, or any other investment consider selling it off. This is because very few assets will give you the rate of returns of a personal loan or a car loan. If you pay a big chunk it will reduce your interest burden. For those who were making the payment during the moratorium period, the installment was going towards reducing the principal. In any loan, you should keep in mind – “the faster you repay, and the larger the repayment quantum, the lesser the interest that you will pay”. This helps you create a surplus that can be used to invest. It rarely makes sense to be investing when you have a loan to be serviced.

Sometimes you may have to borrow for a medical emergency – many people did not have adequate medical insurance cover for covid. Sentimentally such loans are a necessity, but the same rules apply here too.

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