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Everything You Need to Know About the Moratorium Period

Moratorium Period

Loans have become popular funding sources for people who need money for urgent or planned expenses. They let you cover the immediate costs without paying them upfront and repay the borrowed amount to the lender in EMIs. However, sometimes, you may find it challenging to repay your EMIs on time, especially during emergencies and financial crunch. Lending institutions offer moratorium periods to provide relief and repayment flexibility during these times.

In the following sections, you will learn what this period is, how to calculate it, its benefits, and who can avail of the facility. Let’s explore more.

What is the Moratorium Period?

A moratorium period in Home Loan is a period for which you do not need to make any EMI payments. The RBI announces these periods on Home Loans as a relief measure for borrowers during economically tough situations. For instance, it announced a moratorium period of three months during the Covid-19 pandemic. Some loan plans already come with these periods, or you may request one if you suddenly fall into a financial crunch. You are exempted from EMI payments for the pre-determined period during this period.

The moratorium period postpones loan repayment, giving borrowers a period of grace. During this period, they can choose not to pay their loan EMIs. Some other loan types, like education loans, also give a moratorium to borrowers before they must start paying the EMIs.

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Moratorium Period Example

To better understand the loan repayment moratorium, suppose you take out a loan with ₹ 5,000 monthly EMI payments. If you lose your job and your financial condition worsens during repayment, the regular EMI payment might become challenging for you. In such a situation, you may call your lender to request a suspension of your EMI payments. After understanding your situation, the loan company may decide to give you a three-month moratorium period. You don't need to make any EMI payments during this period. You may find a new job in these three months and return to repaying the EMIs on time.

Formula of Moratorium Period

The interest during the moratorium period varies according to the loan type and the company’s terms. The common methods include the following:

  • Simple Interest Formula: Interest = Principal x Interest Rate x Time Period

You may pay the accrued interest or add it to the principal amount while recalculating the repayment plan after the moratorium.

  • Compound Interest Formula: A = P (1 + r/n)^(nt)

Lending institutions use this method to calculate interest on the principal amount and the accrued interest amount. The compounding frequency may vary, though it continues accumulating during the period.

  • Revised Schedule

You may get a new repayment schedule after the period ends according to the accrued interest. The lender may extend your tenure or increase your monthly EMIs. Review your lender’s terms carefully and seek clarification if required.

Benefits of the Moratorium Period in a Loan

You can enjoy several benefits with a moratorium period in Home Loan. These include the following:

Financial Relief

Pausing the EMI payments for a few months can be a great relief during a financially challenging situation. It gives you time to recover and return to timely repayments after the period ends.

Avoidance of Penalties and Late Fees

Since the lender allows you to skip the EMI payments during the moratorium duration, they do not charge any fees or penalties for the delayed payments.

Preservation of Credit Score

The loan repayment moratorium does not impact your credit score. You can skip your EMI payments for a few months without showing them in your credit report. So, it has no bearing on your future borrowing capacity.

Eligibility for a Loan Moratorium Period

Your eligibility for a loan repayment moratorium depends on the following factors:

  • Loan Type: Most types of loan borrowers are eligible for a moratorium, including personal, home, and Business Loans.

  • Repayment History: Borrowers with a consistent repayment history have higher chances of getting a moratorium.

  • Genuineness: You must convince the lender of your genuine financial issues and intention to repay after the moratorium ends.

Grace Period vs. Moratorium Period

People often confuse a moratorium with a grace period. While both offer relief from EMI payments for some time, they are different in many ways:

Grace Period Moratorium Period

The grace period is the duration after the due date, during which you can pay the due EMI without any penalty.

The moratorium period is the duration for which the lender exempts you from making the EMI payments.

The lender does not charge any interest on the balance if you pay it in full before the grace period ends.

Even after sanctioning a moratorium, the lender may still charge interest on the due amount.

A grace period often ranges from 20-25 days, according to the lender's policy.

The moratorium period is longer, ranging from 3 to 6 months.

The lender provides a common grace period to all borrowers, irrespective of their financial condition.

The purpose of a moratorium is to relieve borrowers from repayment during financial hardships temporarily.

Conclusion

A moratorium period can be advantageous if you want temporary relief from your EMI payments. In case you are facing serious financial issues or hardships, you can enter into a moratorium duration. Lenders perceive it as a positive step as it shows your intention of discipline once your period of financial crunch ends. However, remember that having a moratorium does not provide relief from the accruing interest. Hence, you must apply for a moratorium only if you have a serious financial crunch and intention to repay the EMIs after the period ends.

Frequently Asked Questions

1. How many months is a moratorium period?

A moratorium period usually ranges from three months to two years.

2. How do I apply for a moratorium?

Approach your lender directly and explain your situation to apply for a moratorium.

3. What types of loans are eligible for a moratorium?

Loan moratoriums are available on all types of loans, including Personal Loans, Home Loans, Business Loans, Loans Against Property, etc.

4. Is moratorium interest-free?

No, the moratorium does not waive the interest payment. It only defers it, which means you still owe the interest to the lender. The moratorium also increases the interest charges, increasing the financial burden on your future EMI payments.

5. Can I pay EMI during the moratorium period?

Yes, the moratorium exempts you from EMI payments. If your finances improve, you can still pay your EMI during the period.

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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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