What is the loan moratorium and what is its impact on a borrower? – Forbes Advisor INDIA
Since the start of the Covid-19 pandemic, loan moratoria have been widely discussed in India. The country’s central bank proposed a moratorium on all term loans for an initial period of three months, which was then extended to an additional three months, from March 2020 to August 2020, in order to provide temporary relief to borrowers in a context of economic slowdown induced by the pandemic.
Here’s what you need to know about loan moratoriums and their pricing for borrowers.
What is a loan moratorium?
A loan moratorium is a legally permitted period that delays payment of amounts owed due to specific installments. The operation is simple:
- Common loan practice is to pay off your loan as soon as it is granted.
- A moratorium period delays this repayment and gives the borrower a grace period before they can start repaying the loan via fixed monthly payments (IME).
- Since borrowers do not have to start repaying their loan as soon as it is disbursed, they can take what is called IME leave and start paying IME after a break.
Who is eligible for a moratorium on loans?
While loan moratoriums are available for all kinds of loans, including home loans, personal loans, student loans, and credit card dues, students are more likely to use moratoriums. Since there can be a gap of several months or years between students who complete their degree programs and get a job, most student loans have a default provision for repayment leave or a moratorium.
In addition to student loans, home loans are more likely to be subject to a moratorium because they are large sums and borrowers may need time to get their financial affairs in order before starting the loan. refund process.
What are the advantages of a moratorium on loans?
Best repayment plan:
A loan moratorium can help a borrower plan their repayment strategy without stress. It can also help them accumulate funds from different sources and start repayment in an orderly fashion instead of rushing to pay without adequate finances. Loan moratorium periods can be used to plan monthly income and expenses and can help borrowers save for future EMIs and miscellaneous expenses.
No negative impact on credit rating:
One of the most important benefits of a loan moratorium is that it doesn’t negatively affect your credit score. Simply put, defaulting on loans in regular installments does not negatively affect a borrower’s credit rating. Thus, a moratorium period has no impact on your borrowing capacity.
Help in the event of a liquidity crisis:
The Covid-19 pandemic was a stark reminder of the devastating impact of an event on the global economy. Dozens of people have seen their savings wiped out due to the loss of jobs or the death of the family’s main income. Therefore, a cash flow or liquidity crisis is a real situation for many.
A moratorium on loans can be helpful in such a situation as it can help you get through a difficult financial crisis. This is especially useful for those facing lower wages or those working in the unorganized sector or small businesses that have suffered a severe drop in their profits during the pandemic. Temporarily interrupting loan repayments can help people in difficulty take stock of their financial situation and plan for a better future.
What are the disadvantages of a moratorium on loans?
No waiver of interest:
One of the main drawbacks of a loan moratorium is that there is no waiver of a loan repayment, it is only deferred. This means that as a borrower you still owe interest to your bank or lender. Moratoriums can also result in additional interest charges which can put additional pressure on your future payments.
While a temporary disruption in loan repayments provides short-term respite, the fact is that the interest arrears eventually catch up with you. And if you haven’t planned ahead, the sudden burden of large payments can derail your monthly budget and disrupt cash flow arrangements.
Increase in loan term:
Longer periods of EMI breaks automatically result in longer loan terms. For example, if you have a moratorium on a loan that was supposed to be repaid in three years, the repayment period will now be extended to four or five years. This can negatively affect your long-term financial goals and derail your debt-free financial stability plans.
A moratorium can be of real benefit to those looking for temporary relief from financial hardship and who have serious cash flow issues. However, a moratorium must be entered into with an intention of discipline with regard to refunds after the end of the moratorium period. Only people with serious financial needs and the means to repay should opt for moratoriums on loans.