Understanding all the financial jargons can be as befuddling as it can be intricate and complex. Regardless of whether you are taking a loan or opening a Bank Account, there are many words that one needs to google, given that, for a layman with a non-financial background, these words/phrases are not a part of everyday vocabulary. All things considered, when you get into an agreement involving money, particularly a loan, you must acquaint yourself with the lingo. One such term that is doing the rounds much more in recent times is the word moratorium. This piece aims to create basic understanding of the moratorium period, in context of a loan from a financial Institution.

Nuts and bolts – What is moratorium period in context of a loan?

A Moratorium period is essentially the period wherein the borrower gets a break or temporary reprieve from loan repayment or the Equated Monthly Instalment (EMI) instalments. It is often alluded to as an ‘EMI Break/Holiday’ since there is no pressure of paying the monthly equated instalments during this period. This is usually designed to help/tide over a temporary period of loss of ability to pay the EMIs.

The Pros

  • Minimise the financial pressure, particularly during situations such as the current Covid-outbreak.
  • Redirect funds towards for basic/essential requirements.
  • Psychological relief in the midst of a tight cash position.
  • No impact on the credit score – you shall not be treated as a defaulter. Thus, ability to obtain credits in future remains intact.
  • No penalty in case of non-repayment of EMIs during the moratorium period.

The cons

  • A moratorium IS NOT a waiver and you have to pay the EMIs later.
  • Although the EMIs may be deferred for say, six months, the interest shall keep accruing on the outstanding loan amount – leading to an increase in either EMI amount or the tenure of the loan. Hence, one needs to make appropriate provisions for this burden post-moratorium. For e.g. if you avail waiver of 2 EMIs, your loan may additionally get extended by 6-10 months, depending on the type of loan and interest rate.
  • Compared to the current interest, the interest payable will be higher and have tax implications as well.

Final Thoughts:  Moratorium – a fair-weather friend or a foe? Do check your loan agreement to ensure its availability. It can be a useful functionality as long as you use it with care.

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