Personal Loan: Is Moratorium a Blessing or a Curse? Find out how this will impact your EMI and interest payments

Borrowers who have difficulty repaying personal loans may be considering the prospect of a moratorium, a temporary period in which they are not allowed to make any payments.

It is noteworthy that the moratorium affects loan repayments as interest continues to accrue, after which one has to pay the combined interest, pushing up EMIs.

Let’s understand how this happens.

Moratorium: how it affects EMI

I. During the moratorium period, interest accrues on the loan unless specifically waived. The accrued interest is added to the principal amount of the loan, increasing the total loan obligation.

II. Extending the term of loans: To avoid a sharp spike in EMIs after the moratorium, banks typically extend the tenor of their loans. The extended term means that the borrower will pay EMIs for a longer period.

III. Increase in EMI amount: If the bank does not agree to extend the term, the EMI amount increases taking into account the accrued interest and the unchanged term of the loan.

IV. Influence: So borrowers may have to pay more over the life of the loan due to the accrued interest. As immediate cash flow pressure is relieved, the overall cost of the loan increases.

Illustration

Suppose you want to take out a personal loan ₹5 lakh at 12 percent interest that you want to repay in 36 months.

Case I: Without the moratorium

The total interest on repayment of the loan in 36 months would be ₹97,857. The total amount that must be repaid is therefore the same ₹5,97,857.

Case II: With the moratorium

Suppose you wait six months before you start paying back the loan. Interest would continue to accrue during these six months.

During this period you only have to pay interest. So follow this formula to calculate the interest:

Interest rate X term X loan amount

(5,00,000 X 12/100 X 6/12 = ₹30,000).

In six months the interest would be accrued ₹30,000. And the total interest would be ₹1,27,857.

The total amount that must be repaid is therefore the same ₹6,27,857.

EMI Calculator for Personal Loans

It is highly recommended to use a personal loan EMI calculator to evaluate the impact of a moratorium on EMIs.

While entering the loan amount, tenure and interest rate into this calculator, you can find out the EMI to be paid along with the total interest to be paid during the loan tenure.