Should you opt for the extended EMI moratorium?
Reserve Bank of India announced an extension of the previously announced three-month loan EMI moratorium by another 3 months to August 31, 2020. The central bank, in March had announced a three-month EMI holiday from March 1, 2020, till May 31, 2020 on all term loan repayments like auto, home, personal loan EMIs and so on.
This extension is especially a big relief for home loan borrowers facing a cash crunch due to the nationwide lockdown and its associated adverse financial impact on the economy.
So, if you are a home loan borrower who opts to avail of the moratorium extension by 3 months and thereby take a total moratorium of six months, this is how it will impact your EMI schedule and total outgo on the loan amount.
If you opt for the moratorium extension, you need not pay the EMIs for 6 months i.e. March, April, May, June, July and August. However, this does not mean that the six months’ EMIs have been waived. It is only a grace period. You will have to continue paying the accrued interest on the loan EMIs (Equated monthly instalments) for these six months.
If you opt for the moratorium on EMI payments, then banks are likely to give you three options:
a) Make one-time payment of the accrued interest payable at the end of moratorium period;
b) Add the accrued interest to the outstanding loan and pay the same by increasing the amount of EMIs to be paid for the rest of the loan tenure.
c) Add the accrued interest to the outstanding loan and pay the same amount of EMI for a longer tenure thereby paying back the full amount.
Let us take the example of a borrower who has taken a loan of Rs 30 lakh with tenure of 20 years paying 8 per cent per annum as interest rate. He pays an EMI of Rs 25,093.
Let see now, what happens to this borrower’s repayment schedule under different scenarios if he opts for the six-month moratorium.
If five years of home loan is left
If the borrower has five years left on the home loan, then the interest that gets accumulated due to the six-month EMI moratorium will be Rs 49,500. If the borrower opts for option (a), i.e., making a one-time interest payment, then he will have to pay Rs 49,500 at the end of the moratorium.
However, if he opts for a higher EMI outgo for the remaining tenure, then in such a scenario, the new EMI amount works out to be Rs 26, 097, an increase of Rs 1,004 in EMI.
If the borrower decides to extend the tenure of the loan while keeping the amount of EMI payments constant, his loan tenure will get extended by two months.
If 10 years of home loan is left
If the borrower in the example has 10 years of loan repayment tenure left, then in such a scenario, the interest due at the end of moratorium will be Rs 82,728.
If the borrower opts to hike the EMI amount after the moratorium period is over, then the EMI amount increases by Rs 1,004 to Rs 26,097 for the remainder of the loan tenure. If he chooses to increase the loan tenure to pay off the interest accrued during the moratorium period, then it will get extended by three months.
If 15 years of home loan is left
If there are 15 years left in the loan tenure, then in such a scenario, the interest due at the end of moratorium will be Rs 1.05 lakh. The borrower can choose to repay this interest amount at the end of moratorium period.
However, if he chooses to go for an EMI hike after the moratorium period, then here also the EMI comes to be Rs 26,097 (an increase of Rs 1,004). If the tenure extension is opted for, then the loan tenure get will extend by four months.
Should borrowers avail EMI moratorium?
It is clear, thus, that the extension of loan moratorium will provide relief to those facing difficulties in servicing their loans due to cashflow and income disruptions. Also, the deferment of loan repayments will neither incur penal charges nor impact their credit score.
However, “those availing the extended loan moratorium will continue to incur interest cost on their outstanding loan amount during the moratorium period. This will increase their overall interest cost. Hence, those with sufficient liquidity to service their existing loans should continue to make repayments as per their original repayment schedule. Remember that the accrued interest on availing the loan moratorium can be significantly higher in case big ticket loans like home loans and loan against property with long residual tenure and sizeable outstanding loan amount.
What should credit cardholders do?
Experts say credit cardholders should avoid availing the moratorium on their credit card dues. The finance charges on outstanding credit card bills can range anywhere from around 24-49% p.a., one of the highest among all credit facilities. Hence, credit card holders availing the 3-month moratorium extension will end up accumulating another 6-12% of their outstanding bill amount as an additional liability.
Instead, credit cardholders unable to repay their credit card bills in entirety should convert their unpaid bill into EMIs. Such EMI conversions come with significantly lower interest rates and their tenures too can go up to 5 years. This will ensure staggered repayment of their outstanding dues in smaller tranches in the form of EMIs, as per their repayment capacity.
Source: Economic Times
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