Five Reasons Why You Should Not Be Opting For a Loan Moratorium

In an attempt to assist small borrowers affected by the second wave of the pandemic, the Reserve Bank of India (RBI), on Wednesday (May 5), unveiled debt restructuring or loan moratorium strategies.

According to the RBI governor Shaktikanta Das, Resolution Framework 2.0 will be available to small and medium businesses, and individual borrowers having aggregate exposure of up to Rs25 crores, who did not restructure their loans under any earlier restructuring frameworks including Resolution Framework 1.0 announced in 2020 and were classified as ‘Standard’ accounts as on March 31, 2021.

The moratorium can give you some relief if you are reeling under the financial consequences of the COVID-19 second wave. But what if your cash flow is consistent? Or, you are not facing a pay-cut or other financial hardships? Is moratorium 2.0 the way to go? To answer these from the borrower’s perspective, let us consider the long-term consequences of a loan moratorium. But before that, we need to understand what a loan moratorium actually is.

What is the EMI Moratorium?
A loan or EMI moratorium refers to a tenure during which the borrower is not required to make any payments on the loan. Borrowers need to start repaying their EMIs only after the moratorium period expires. Most people confuse a loan moratorium with a loan waiver. Unlike a loan waiver which means not having to pay EMIs anymore, a moratorium just delays your EMI payment by a few months after which you need to resume paying EMIs.

Since a moratorium does not close the loan but just delays repayment, it is important to consider the long-term effects of a loan moratorium on borrowers to avoid any financial mishap.

            Also Read: All You Need To Know About Your EMI

Reasons to Avoid a Loan EMI Moratorium

1- There is a Cost Attached
If you are in the early stages of repaying your loan, such as the first to third year, missing an EMI will result in additional interest being applied to your loan. This is because the interest forms a large part of loan payments in the early years. Missed payments become a financial strain in the long run due to the longer loan tenure and additional interest.

2- More EMIs for Long-term Loans
Let us assume, last year, you took a loan for Rs 50 lakhs at the interest rate of 8.5% with a 20-year term and decided to postpone the EMI payments with the help of a three-month moratorium. Now, if your EMI was Rs 43,391 before the moratorium, it will go up to Rs 44,320 after the moratorium. The amount of unpaid interest that accumulates during moratorium months will simply increase the number of EMIs that must be paid. In the long run, this will increase the cost of repaying the loan for the same term, making it more expensive.

            Also Read: Tips To Effectively Manage Your EMI

3- Avoid Moratorium for a Loan with a High-interest Rate 
If you previously took a loan with a high rate of interest and then decide to forgo the EMIs by taking advantage of the moratorium, your payable interest will skyrocket.
For example, if you are left to pay EMIs for two or more years and you choose the EMI moratorium of three months then your three months' interest will be added to the two-year EMI period along with the three months you chose as a moratorium. Therefore, the additional interest will increase your future financial liability.

4- Impact on Credit Growth 
It is widely believed that the moratorium does not affect the borrower’s credit history. However, this is not always the case. Although the RBI has instructed financial institutions to report moratorium cases as ‘restructured’ to credit bureaus, a lender may choose to ignore the restructured flag. It is solely up to the lender’s discretion to determine whether or not moratorium borrowers are capable of loan repayment and may differ from one lender to the other.

5- Affects Your Debt Raising Capability
Choosing a moratorium will help you in not being reported as a non-performing asset (NPA). However, it may have a short-term impact on your ability to raise finance. While some financial institutions may take caution for some time when sanctioning EMI-based loans to people who have opted for the EMI moratorium, others may not. It totally depends on the lender to consider or ignore the moratorium factor.

            Also Read: Missed Your Last Few EMI’s? Here Is What to Do Next

Conclusion
You should opt for the moratorium only if you are in a financial emergency. If you have any means to ensure uninterrupted EMI payment, then it is better to steer clear from the option of availing of the moratorium. Remember, any day, the disadvantages of opting for a loan moratorium outweighs the benefits. It not only affects your future capacity or borrowing limit but also increases the future loan price. With the ongoing pandemic situation and frequent lockdowns, there are more chances of you needing more financial assistance and opting for a moratorium now will not help you then.