Stay Away From 3 month Loan Moratorium

The COVID 19 virus has disrupted lives across countries and people are having a hard time. Our life will not be the same any more as this has caused massive economic and psychological damage to the common man. The bottom rung of the economic strata are facing the maximum heat, with many people facing reduced pay and job cuts. Keeping this in mind the Reserve Bank of India has directed the Indian banks to provide a repayment moratorium of three months. A Loan moratorium means that you don’t have to pay EMIs for 3 months. It is not a waiver of the EMIs, you still have to pay the loan EMIs.

While the move to provide for the loan moratorium should be lauded, it is prudent to know the dire consequences of availing this facility to your finances. Not paying your EMIs come at a cost as the unpaid EMIs are added to your outstanding principal and interest is charged on the same for the rest of the tenure. The below chart shows the impact of availing this for different loan durations;

Before you take any knee jerk reaction, it is important to understand the impact of such a move. The below example illustrates the real cost of availing the EMI Moratorium for an EMI of ₹ 50,000/- is illustrated in the below table;

Loan Tenure Moratorium Revised Term Extra EMIs Extra Cost
36 Months 3 months 40 Months 1 ₹ 50,000/-
60 Months 3 months 65 Months 2 ₹ 1,00,000/-
120 Months 3 months 128 Months 5 ₹ 2,50,000/-
180 Months 3 months 191 Months 8 ₹ 4,00,000/-
240 Months 3 months 258 Months 15 ₹ 7,50,000/-
*Assuming 8.5% as the interest rate

It is clear that from the above that longer your loan duration higher would be the impact of availing the loan moratorium. Just a three month pause can set you back by ₹ 7,50,000/- over the next 240 months. The 3 month delay in can cost you dearly in the long run. If your cash flows are steady and your salaries are coming in it is better to pay up those EMIs and save yourself unwanted costs. Paying your EMI on time ensure that you complete your repayment faster and not carry the burden for an extra 15 months.

How are banks implementing the Loan Moratorium?

One thing is clear that the move to provide for loan moratorium is a good move by the RBI, but it is only helpful for those people who are really feeling the pinch. While some banks are assuming that everyone would want to opt-in for this and have enabled as default for all loans. A few other banks are giving their consumers an option to opt-in. It is strongly suggested that you communicate with your bank your willingness to opt-in or opt-out of this facility to ascertain that unwanted charges are not added to your loan EMIs.

Impact on Taxes

There is an impact of not paying the EMIs on your tax exemptions. If you have not paid the EMIs, you will not be able to claim the exemption on interest paid on your housing loans. So choose wisely !!!

Get a Free consultation call with our Fee Only Financial Planner where you can learn about good EMI vs bad EMI, the ideal EMI as a % to your income and many other aspects of your loans.

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