Personal Finance

Opting for 6-month moratorium? You may end up paying this much extra

Updated : May 26, 2020 08:56 PM IST

The deferment of loan repayments will, however, neither incur penal charges nor impact the credit score of borrowers.

The extension of equated monthly installments (EMIs) moratorium announced by Reserve Bank of India (RBI) may provide relief to those facing liquidity issues but may increase the overall interest cost, according to experts.

The central bank had announced an extension of EMI moratorium on all term loans by three months i.e. till August 2020. Earlier, the central bank had announced a three-month moratorium on all term loans outstanding as on March 1, 2020.

The deferment of loan repayments will, however, neither incur penal charges nor impact the credit score of borrowers.

"The accrued interest on availing the loan moratorium can be significantly higher in case of big ticket loans like home loans and loan against property with long residual tenure and sizeable outstanding loan amount,” explains Naveen Kukreja, CEO and Co-founder, Paisabazaar.

Those availing the moratorium may be given three options to repay the amount.

(Also read: Why one shouldn't opt for moratorium on credit card payments)

Either they can make one-time payment of the interest accrued during the EMI deferred period or the interest can be added to the outstanding loan and increase the EMI for remaining months. Alternatively, borrowers can keep the EMI unchanged but the loan tenure can be extended.

The number of additional EMIs or tenure will nevertheless also depend on the tenure of the loan left and the rate of interest (ROI).

Rachit Chawla, founder and CEO Finway explains this with an example.

"For instance, a borrower has taken a loan of Rs 30 lakh for 20 years at 9.5 percent, the EMI would be around Rs 28,000. Let's say he takes the benefit of the moratorium and do not pay for six months. That way he may save around Rs 1,68,000 but at the same time, the tenure period will go up by 4 years (in case he avails the option of increasing the tenure) and will have to pay back a staggering amount of Rs 11.4 lakh as additional interest,” he adds.

BankBazaar has shared a table that shows the increase of tenure and EMIs on availing 5-month moratorium i.e. from April to August.

(Source: BankBazaar)

In this case, it is supposed that the borrower has taken a home loan of Rs 50 lakh for 20 years and ROI is constant at 8.50 percent. He is required to pay 240 EMIs, where the EMI amount is Rs 43,391 per month and the total interest is Rs 5,413,879.

"Now, say he avails the moratorium from April to August and has two options to pay the amount. In case these are the first five EMIs that are deferred (he being a beginner in EMIs), the tenure will increase by 30 months to 270 months (if he opts for increasing the tenure). The new total interest will be Rs 6,482,470 and the additional interest will be Rs 1,068,491. In case he opts to increase EMIs and keep the tenure same, the new EMI he will have to pay is Rs 45,316 per month. This is an increase of Rs 1,925 per month," according to BankBazaar.

(Also read: What RBI's repo rate cut means for loan EMIs)

The other examples have taken into consideration where the deferred EMIs are 13-17, 61-65, 121-125 and 181-185 and accordingly are the increase in tenure and EMI.

Opting for 6-month moratorium? You may end up paying this much extra

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