Moratorium Period: Calculation And Benefits

Moratorium Period: Calculation And Benefits - Namma Family Builder

What Is Moratorium?

  • A moratorium is a temporary postponement of an action by formal agreement. This means that if a policy is announced by the country’s banking regulator, borrowers can stop paying their EMIs for the duration of the moratorium.
  • If banking regulators impose a moratorium on loans, those who cannot write off their EMIs for the moratorium period will not be classified as defaulters.
  • The moratorium is an important aspect of certain types of loan products, for example, education loans. As the loan amount can be repaid only after the students go to work, banks give them the time they need.

What Is Moratorium Period?

  • As it is a temporary suspension of an activity, a moratorium is declared for a specific period of time, which is called a moratorium. A moratorium for a home loan means that you do not need to write any EMI amount.
  • RBI announces these periods as a relief measure to borrowers who are in a difficult situation due to some economic problem. You can opt for non-repayment.
  • Some other types of loans like education loans also impose a moratorium on borrowers before paying the EMI. Once the moratorium is over, the outstanding amount must be repaid.

Should You Consider Moratorium Period

  • Although a moratorium is also convenient to choose the period, the borrower must understand that the interest must be paid during the grace period. This is monthly, quarterly, and simple interest.
  • If the borrower decides to defer the entire amount, the interest charged during the holiday periods will be adjusted in monthly installments and added to the total amount.
  • Usually, the interest can go up to 10 percent of the total principal amount plus the interest charged. In this offer, the developer pays the interest on behalf of the buyer for the duration of the holding.

Eligibility For A Loan Moratorium Period

  • RBI and banks have carefully laid down specific guidelines and eligibility whenever they announce a moratorium and specify the details of those who are eligible for this moratorium.
  • Types of Loans: Most borrowers are eligible for moratoriums such as personal loans, home loans, business loans, and education loans. People with a consistent repayment history are more likely to get a moratorium. You need to convince the lender of your financial difficulties and your intention to repay after the moratorium.

Formula And Calculation Of Moratorium Period

The interest on moratorium may vary according to the type of loan and the institution. They are:

Simple Interest Formula:

Interest = Principal x Interest Rate x Duration

Your accrued interest can be paid off or added to the principal amount while calculating the repayment plan after the grace period.

Compound Interest Formula:

A = P (1+r /n )^ (nt)

Lenders use this formula to calculate the principal amount and accrued interest. The lender may extend your tenure or increase your monthly EMIs.

Benefits Of The Moratorium Period In A Loan

A home loan moratorium can also enjoy many benefits over time.

Financial relief:

  • Deferral of EMI payments for a few months can be a great relief in financially challenging situations as it provides the necessary time to make timely repayments after the expiry of the period.
  • Avoidance of Penalty Charges
  • If the lender allows you to avoid making EMI payments during your grace period, they will not charge you any late payment penalty.
  • Protecting your credit score
  • A moratorium on loan repayments does not affect your credit score. You can skip EMI payments by not showing your credit report for a few months. These do not affect your future borrowing capacity.

Difference Between Moratorium Period And Grace Period

Moratorium period Grace period
A Moratorium period of time allows the lender to stop making payments for a specified period of time.
The grace period is the period of time after the due date during which money can be paid without incurring any penalty.
Even after allowing the moratorium, the lender may charge interest on the outstanding amount.
If paid in full before the end of the grace period, the lender will not charge interest on the balance.
The grace period is longer than the grace period.
If the grace period is granted, they automatically provide it to their customers.
It aims to temporarily relieve borrowers from repayment due to financial distress.
The lender offers a grace period to any borrower regardless of their financial status.

Advantages

  • If you are in the early stages of repaying your loan, choosing a moratorium period will give you a buffer to plan for various expenses like stamp duty, brokerage, etc. Some of the advantages of a moratorium are:
  • Hard-pressed borrowers can manage and focus their finances on daily essentials.
  • Getting this moratorium facility will not always affect the borrower’s credit score even if your extensions are introduced, thus helping you to get other loans in the future.
  • If you opt for this facility then there is no penalty imposed by the banks and no payment is missed after the suspension period.

Conclusion

  • If you want to get temporary relief from EMI payments then a moratorium is beneficial for them. If you face severe financial problems and hardship then you can go for a moratorium.
  • Having a moratorium does not give you relief from accrued interest. You should apply for a moratorium only if you intend to repay the EMIs after your period of financial hardship is over.