The ongoing Coronavirus pandemic has brought the whole world to a standstill. With more than 1600 cases in India, the entire country is in lockdown. With factories shutting down production, hotels, malls, restaurants and other entertainment complexes closed, millions of Indians find themselves facing a massive economic crisis on top of the ongoing health crisis.
Last week, the RBI (Reserve Bank of India) announced a three-month moratorium on all existing loan payments. This comes as a huge relief to millions of Indians, who are struggling to make ends meet as the nation is quarantined. The assistance is offered to all loan categories like home loans, car and bike loans, personal loans and education loans. Besides loans, customers can also postpone their credit card payments during the moratorium period.
At first glance, taking this option feels like a huge relief. Instead, of spending your savings on making loan repayments, you can use the cash in hand to meet your daily expenses. But, the big question here is – should you opt for the moratorium?
The short answer is – Do NOT pause your loan EMIs and credit card payments if you can afford to pay it.
For the long answer, continue reading this guide from CreditMantri.
What is the moratorium announced by the RBI?
The RBI on 27th March 2020 announced that all banks and NBFCs will offer a moratorium of three months, for repayment of existing term loans. The moratorium period is from 1st March 2020 to 31st March 2020. It includes repayments of loan EMIs, principal and interest components, bullet repayments as well as credit card dues.
What it means is that during the moratorium period, borrowers of term loans and credit cardholders do not have to pay the loan EMI instalments, if they so desire. Generally, when a borrower misses on loan EMIs, it leads to a downgrade of credit rating and affects the risk classification of the loan.
However, during the moratorium period, missed repayments will not have any adverse impacts on the credit rating of the borrower nor alter the terms and conditions of the loan.
While that’s a huge relief for borrowers, financial experts agree that it’s not the best solution, especially when you can afford to repay your EMIs on time.
Who should opt for the three-month EMI moratorium?
The moratorium announced by the RBI is immensely beneficial to:
People working in the non-organised sector
Salaried individuals who are dealing with pay-cuts, delayed salaries or layoffs
Businessmen who are facing a severe cash crunch due to the lockdown
Employees of an industry that is directly impacted by the Covid-19 pandemic like tourism, aviation, etc.
Individuals who do not have sufficient emergency corpus to meet living expenses as well as unexpected medical costs
If you fear that your regular income will get disrupted in the next few months, then you can avail this benefit and use the limited funds in hand to build an emergency corpus. By postponing EMI repayments and credit card payments by three months, you can use the meagre funds in hand to meet your family’s day-to-day expenses.
Why should you NOT pause EMI payments during the three-month moratorium?
Deferring Payments increases your Loan Burdens in the Long-Run
Deferred payments during the moratorium period do not impact your credit ratings. However, note that your loan outstanding will continue to accrue interest during these three months. The entire interest accrued during the three months will be added to your June EMI. The interest will have to be repaid as a lump sum when you pay the next regular instalment in June. This means you will be paying higher EMIs or extend the tenure of your loan in the long-run.
Pay off Credit Card Dues to avoid Exorbitant Interest Rates
The RBI has announced that credit card payments can also be deferred during the moratorium period. However, cardholders have to keep in mind that the moratorium only postpones the current payments. The outstanding payments will continue to accumulate interest for the entire moratorium period. As a result, cardholders will have to pay higher bills once they resume their payments after the moratorium period. This can further deepen your financial crisis, as the impacts of the Coronavirus will continue for the next few months or more.
Analyse your current Financial Situation before Availing the Moratorium
If you have lost your job, in the danger of losing it or face a severe cash crunch due to the non-functioning of your business, then the moratorium offers you the much-needed breathing space, till you get back on your feet.
For others, who are still receiving their salaries and have a steady job, it’s highly recommended that you continue with your EMI payments as before, to avoid increasing your loan burden.