In view of cash flow and income disruption due to the ongoing COVID-19 pandemic, RBI has announced the extension of the Moratorium period for up to 31st of August. Although it will ease the repayment worries for the borrowers, it will certainly increase the debt burden as they will need to repay with additional interest on the outstanding loan amount.
In case you have already opted for the moratorium period and plan to extend the same for the next three months, you must read ahead to know how it will impact your financial health.
What is the Moratorium period?
Moratorium period refers to the time period where you do not have to pay any EMI on the loan taken from a lender. This is also known as EMI holiday period. Moratorium period helps individuals to break away from temporary financial difficulties and also allows them to plan their finances better. EMI period accrues interest on the outstanding loan amount which has to be borne by the borrower.
Wondering if opting for EMI Moratorium will help in planning your finances better? Here are the things, you must know.
#1. Three options to repay the accrued interest during the moratorium period
The moratorium can be a relief if you are facing a cash crunch at the moment due to the cash flow disruption. However, it accumulates an interest amount for the 6 months which can be a huge amount. To overcome this challenge in repayment, RBI has put forth three options to repay the interest amount. They are
The borrowers can make one-time repayment of accrued interest at the end of the moratorium period. This allows the borrowers to get rid of the interest debt much sooner and begin a normal repayment schedule.
The accrued interest can be added to the outstanding loan amount and repaid as per the tenure with an increase in EMI amount. This option will help the borrower to spread the payment across the tenure which will have less impact on your finance.
Add the accrued interest to the outstanding loan amount and repay the same EMI with an increase in the tenure. In this case, the customer will have to pay a few more EMIs additionally.
#2. Taking Moratorium may affect your credit card limit
Moratorium policy has pushed credit card issuers to take some drastic measures to reduce the risk of lending out to their customers. Credit card limit of certain customers has been revised by the card issuers especially those who opted for the moratorium period. Banks either lower their card limit or block it completely. Although this action is taken by the card issuer due to the ongoing economic crisis, banks claim that it is customary to periodically review and revise the credit card limit of their customers. Opting for a moratorium may very well block you from getting some funds from the bank especially in times of severe financial crisis. Henceforth, it is recommended not to opt for the moratorium facility in order to keep the credit options open.
#3. Fresh purchase during moratorium using your credit card accrues interest immediately
Credit card issuers usually charge an interest of 3% to 4% per month on delayed credit card payments. If you have opted for the moratorium of 6 months for your credit card dues, you must know that a fresh purchase during the moratorium period will accumulate interest from the day 1 itself. At the end of 6 months, you will have a huge interest amount to be paid along with the outstanding dues. Skipping moratorium facilities and making regular payments will help you plan your finances better and avoid unnecessary debt burden.
#4. Opting for Moratorium may curtail you from availing fresh credits for some time
If you have opted for a moratorium period for 6 months on all your loans, it would mean that there will be no credit activity reported on your credit report. If you try to apply for a fresh credit during the moratorium, the lender may be unwilling to offer you EMI based credit as the risk is higher. Underwriters may want to see a repayment record of 6 to 9 months after the completion of the moratorium period.
#5. Taking Moratorium will not affect your credit health
This is the only relief offered by the Moratorium facility for the borrowers. The non-payment will not be reported to the credit bureaus as a Non-Performing Asset (NPA), and no late payment fee will be charged. Your credit health will not take a hit by opting for the moratorium period, but it is going to increase your debt burden by a huge amount.
Should you opt for the Moratorium 2.0?
You must keep in mind that the moratorium is not an EMI waiver but deferment of payment. Your repayment date is just postponed for which you pay a price in the form of interest charges. If you have already opted for the earlier 3 months moratorium, taking this one too is not recommended as the additional payment will increase by a huge amount. Your financial commitment will be extended which curtails you from planning your finances in advance.
In view of the borrowing ability, the lender may want to see a consistent repayment record after the moratorium period to assert your creditworthiness. Not being able to borrow during a financial crisis can cause stress to your personal life. Try to ensure that you are creditworthy to avail all types of credits at all times. Although the non-payment does not affect your credit health, it can certainly increase your financial burden. Why take such risks if you have the option of making on-time repayments? Henceforth, we recommend you to avoid the moratorium period and stay financially healthy.