The loan moratorium and restructuring announced by the Reserve Bank of India (RBI) as part of Covid-19 pandemic-related financial relief measures allowed some breathing time to borrowers as they faced a severe cash crunch.
A loan moratorium may not suit all kinds of borrowers and may even prove costly for some as the interest keeps on piling. Here, we will explore some of the alternatives to loan moratoriums that can act as additional relief to borrowers during these challenging times.
What are the other alternatives available to borrowers?
If you’re considering a loan moratorium, you have two main options:
- Dip into your emergency fund to continue paying your EMIs as per schedule. We understand that this may not be possible for all, giving the stressed economic conditions. If that’s the case, you can consider the next option:
- Go for loan restructuring after discussing with banks
Consider Loan Restructuring Instead of a Moratorium
Loan restructuring allows borrowers to delay repayment of interest and principal amount, or repay existing loans at more reasonable terms and conditions. Bankers advise borrowers to use loan restructuring instead of a loan moratorium.
Under loan restructuring, banks can offer borrowers to reschedule loan repayments, convert interest accruals or to be combined into another credit facility. It also allows the extension of loan tenure depending on the current repayment capability of the eligible borrowers.
Home loan restructuring allows EMI deferment for a few months in case the borrower has incurred a loss of income. It allows step-up EMIs with a lower pay-out for a few years to cover for a reduction in salary or loss of income during the pandemic.
A 15-year home loan, for example, will see a loan tenure extension of 14 months if the borrower uses loan restructuring. Thus, most banks can defer EMI by a few months.
The exact relaxation depends on the interest rate charged by the bank. While home loan rates have come down across India, banks find it difficult to provide their best interest rates to customers opting for loan restructuring.
What would you do if you had taken the loan moratorium?
Borrowers who had opted for the six-month moratorium and can repay the loan after the moratorium period. They can either repay it through a single payment or request lenders to continue with the existing EMIs. Borrowers also have the option of converting moratorium period interest accruals into a separate loan.
Borrowers can keep their EMI the same as before and the loan tenure can be extended as per individual requirements. It is however advisable for borrowers to aim for prepayment of EMIs within the next 12 months to get rid of the additional debt burden.
An ideal choice is to pre-pay 120% of the EMIs that have been deferred. Therefore, if a person has deferred up to five EMIs, it makes sense to prepay six additional EMIs in the next 12 months. This will help them come back on track with the repayment plan and come out of the debt burden faster.
Do borrowers end up paying more in loan moratorium?
As per the loan moratorium announcement by the RBI, interest will continue to be accrued on the outstanding loans during the moratorium period. Hence, borrowers who have sufficient liquidity should continue to service their existing loans as per the original repayment schedule.
Many banks have given three options to a borrower who used the loan moratorium relief:
- One-time payment of the accrued interest payable to be made at the end of the loan moratorium period.
- Accrued interest is to be added to the outstanding loan and to be repaid by increasing the amount of EMIs for the remaining loan tenure.
- The accrued interest is to be added to the outstanding loan and paid as part of EMI for a longer tenure to ensure repayment of the full amount.
Those who have too many outstanding loans must try to consolidate them under a single collateralized loan umbrella. Collateralized loans are far cheaper as these are less risky when compared to unsecured loans. It is advisable for borrowers to take a loan against assets to repay the costlier or high-interest loans.
If a borrower has an ongoing home loan and has repaid it for a few years, he/she can use a top-up loan for repaying other high-cost borrowings and consolidating debt under a cheaper loan. For example, an unsecured personal loan comes with an interest rate of 16-18% while a top-up home loan may barely charge 7-8%.
Those who are working on debt repayments must keep a close watch on their credit score. While non-payment of dues during the loan moratorium may not impact credit scores, since that the payment holiday is almost over, any non-payment can hurt the credit report and impact the chances of availing credit in the future.
- Is the loan moratorium extended in 2021?
If the loan moratorium availed by a borrower was for under two years, such borrowers can apply for an extension of the moratorium such that the total moratorium period is up to 2 years. This is, provided the borrower had been making timely repayments till March’21.
- How can I get an EMI moratorium?
To avail EMI moratorium, you must reach out to your bank from which you have existing borrowings.
- Who is not eligible for a moratorium?
Any borrower who has net borrowings of more than Rs. 2 crores are not eligible for loan moratorium.
- Is interest paid during the moratorium period?
A borrower does not have to make interest payments during the moratorium period. However, the applicable interest continues to accrue throughout the moratorium and must be paid as part of the EMI payments post the moratorium comes to an end.
- What happens after the moratorium period?
Borrowers must explore alternatives like loan consolidation, borrowing low-interest loans to repay existing high-interest loans, etc once the moratorium period comes to an end.