To Take Or Not To Take EMI Moratorium Factors To Consider

The Reserve Bank of India’s direction to all Indian financial institutions to allow a three-month moratorium on loan EMIs and credit card payments has been a welcome move, given the severe financial stress many people are facing now. The aim is to help solve the short-term liquidity concerns of common people. But are the after-effects of opting for a moratorium really that helpful? Let us understand what this actually means.
 
What EMI moratorium actually means
The EMI moratorium does not mean that the interest for three months is foregone. Instead, there are three options to manage the loan without affecting your credit score. So what are the options?

1. Make a one-time payment in June for the interest accrued from March – May.
2. Increase the EMI for the remaining months.
3. Let the EMI remain the same and increase the tenure of your loan repayment.

The ability to pay the EMI. Remaining tenure of the loan. Interest rates on your existing loan. For more clarity on whether it's the right choice for you, see Personal loan moratorium period explained.

 
Factors to be considered 
It is good to remember that the EMI moratorium has a cost involved in terms of increased interest payments, which will only add to your EMI burden, or increased loan tenure, if the 3 months’ interest is not paid at the end of the moratorium period. Hence, before deciding to opt for this moratorium consider the following factors.
 

• The ability to pay the EMI  

First of all, if you are facing a short-term liquidity crisis because of your inability to earn income or due to reduced income, it is better to opt for the moratorium and keep adequate liquidity in hand. Since the non-payment of EMI will not negatively affect your credit score, it will be better to focus on the problems of today rather than worrying about those of tomorrow.
 

• Remaining tenure of the loan

If you choose to opt for the EMI moratorium for three months and wish to keep the EMI unchanged after this period gets over, your loan tenure will increase by 3 months. This means, you will have to continue paying EMIs for additional three months as the interest will accrue for those 3 months and will have to be repaid later.
 

• Interest rates on your existing loan

If the interest rate is high on your loans, especially credit card, you should refrain from availing the loan moratorium unless there is a liquidity crunch. Check with your lender by how much your interest will increase and how it will affect your EMI or loan tenure before making a decision.
 
Repercussions of taking the moratorium 
Taking the moratorium will cost you interest at the contracted rate for the period of the EMI moratorium on the loan outstanding.
In other words, the deferment of EMI means that you have to pay an additional interest for the period of moratorium.
Another repercussion either will be an increased EMI or increased loan tenure. In case you decide to pay the interest amount in June, the liquidity situation that you managed to improve for the past three months will deteriorate with a high interest payment.
Especially for credit cards, the interest charged is usually high, which will lead to a high cost on the loan outstanding. So, taking the moratorium will only mean a deferment of the loan repayments and that too at an additional interest cost.
 
Conclusion
The EMI moratorium isn’t a waiver of loan EMI or the loan interest for three months. It is only an option to defer your loan payments for three months, without worrying about the credit score. If you are amongst the privileged few who still have a regular income and the ability to repay, it is advisable to continue paying EMIs to avoid the higher interest cost of the EMI moratorium.
Higher accrual of interest for the moratorium period of three months will accrue a higher loan amount, which can affect your pocket in these troubled times. Even without penalty, three months’ interest will be a high cost to bear, especially when the interest rates are already high on credit cards. So, make an informed decision based on your liquidity conditions and avoid taking the EMI moratorium if you can.