Moratoriums give borrowers a break from their EMI payments; however, that doesn't mean the loan will be forgiven. The amount owed on the loan may increase because interest continues to accumulate during the moratorium period. To help borrowers make the best financial choices, they should understand how a moratorium works.
This article will discuss the moratorium period in the loan, how it works, its advantages, and how to apply for one.
How Does a Loan Moratorium Period Work?
Understanding how a moratorium works is important before applying for one. The relief may help temporarily; however, it can also increase the overall repayment burden.
Temporary Pause in EMI Payments
During the moratorium period, borrowers can suspend their EMI payments to the lender, in accordance with the terms of the moratorium. The moratorium will provide short-term relief from financial hardship caused by an emergency or loss of income.
The loan will still be valid even if the payments are suspended. The lender is simply postponing the repayment schedule under the agreed moratorium terms.
Interest Continues to Accumulate
Borrowers should be aware that unpaid interest will continue to accrue during the moratorium period. Any unpaid interest at the end of the moratorium period may:
- Be added to the outstanding loan principal
- Increase future EMI amounts
- Extend the loan tenure
As a result, the total amount that you owe on the loan will increase during the moratorium period.
Revised Repayment Schedule
After the end of the moratorium, the lender changes the repayment terms, which can include:
- Higher monthly payments
- Longer repayment time
- A mix of both
This revision depends on the lender’s policies and the borrower's financial situation.
Approval Depends on Eligibility
Approval for a moratorium is not guaranteed. You must formally apply to your lender and submit additional documents demonstrating that you are having financial difficulty. In deciding whether to approve your application, the lender may consider:
- Your repayment history
- Your financial condition
- The type of loan
- The outstanding loan amount
How is Interest Calculated During the Moratorium Period?
Interest calculation during the moratorium depends on the lender and loan type.
Simple Interest Method
Interest is calculated only on the principal.
The formula used is:
Simple Interest = (P × R × T) ÷ 100
Where:
- P = Principal amount
- R = Interest rate
- T = Time period
This is used for education loans or personal loans.
Compound Interest Method
Some lenders may compute compound interest during the moratorium time.
A=P(1+rn)
nt
Where:
- A = Total amount payable
- P = Principal amount
- r = Annual interest rate
- n = Number of compounding periods
- t = Time duration
Compound interest adds substantially to your total repayment over a period of time.
Partial Interest Payments
Some lenders will allow a borrower to pay only the interest portion of the payment that is due during the moratorium. However, this option will not provide total financial relief, as you will have made only partial reductions to both interest and principal.
Benefits of a Moratorium Period
A moratorium period can provide important financial support during difficult situations.
Temporary Financial Relief
Individuals can stop making their monthly instalment payments (EMI) and obtain funds to cover immediate expenses such as medical bills, rent, and household needs.
Protection Against Default
If a moratorium is officially approved by the lender, missed EMI payments during the approved period are generally not treated as defaults.
Better Cash Flow Management
Individuals and businesses can use the temporary relief provided by the moratorium period to stabilise their finances and improve their income.
Reduced Emotional Stress
The stress of financial difficulties often hurts a person's mental health. A moratorium can provide temporary relief from financial stress during periods of uncertainty.
Credit Score Protection
An approved moratorium may not negatively affect your credit score if the lender reports it correctly to credit bureaus.
Moratorium Period vs Grace Period: Key Differences
Many borrowers mistakenly interchange these two terms. However, they are two distinct periods.
|
Aspect |
Moratorium Period |
Grace Period |
|
Meaning |
Temporary suspension of loan repayments |
Extra time allowed after the EMI due date |
|
Purpose |
Financial relief during hardship |
To avoid penalties for minor payment delays |
|
Duration |
Usually several months |
Usually a few days |
|
Interest |
Continues to accrue |
May continue to accrue, depending on lender policy |
|
Loan Status |
Officially approved deferment |
Short extension before penalties apply |
How to Apply for a Moratorium Period?
Applying for a moratorium generally involves the following steps:
Step 1: Contact the Lender
The first step is to contact your lender to inquire about the availability of a moratorium. Inquire about:
-
Eligibility requirements
-
Length of moratorium offered
-
Interest rates
-
Documentation needed to complete the application
Step 2: Submit a Formal Request
Borrowers must submit a written or online application requesting the moratorium. Clearly explain the financial hardship faced.
Step 3: Provide Supporting Documents
The lender may need supporting documents like:
-
Salary slips
-
Termination letters
-
Medical reports
-
Bank statements
-
Business loss records
Step 4: Review Revised Loan Terms
If your loan terms were changed, review the new terms and conditions before accepting them. You will need to understand the following:
-
EMI amount
-
Loan tenure
-
Total repayment cost
Step 5: Maintain Documentation
Save copies of the approval letter, revised payment schedules, and any correspondence with the lender for future reference.
Common Situations Where Borrowers Consider Moratoriums
People apply for moratoriums when they have had a temporary disruption in their finances. Below are some common reasons people apply for a moratorium on their loans.
- A sudden loss of employment
- An unforeseen medical emergency
- A decrease in revenue from their business
- A disaster or natural calamity
- A financial downturn caused by a global crisis
- When their employers have delayed payment of salaries due to cash flow problems
Moratoriums should be viewed as a temporary measure to assist with a genuine need.
Things to Consider Before Applying
Before applying for a moratorium, individuals should carefully consider how the moratorium will affect their future budget.
Calculate the Additional Interest
You should calculate how much extra interest will accumulate while you are not making loan payments.
Assess Future Repayment Capacity
You must assess whether you will be able to repay future EMIs after the moratorium ends.
Use Only During Genuine Need
You should only use the moratorium as a last resort.
Explore Alternative Solutions
If you can restructure your loan or reduce your discretionary expenses, you may want to consider this option before applying for a moratorium.
Read Also: What Are EMI Bounce Charges and How to Avoid Them
To Conclude
Borrowers can take advantage of a moratorium by pausing EMI payments, which can provide much-needed financial relief. It is important to be aware that while the moratorium period temporarily suspends your regular EMI payments, interest will likely accrue during this time. Before applying for a moratorium, borrowers should fully understand the new repayment structure and how it will impact them in the long term.
If you are having temporary financial difficulties, it is wise to compare the benefits and additional costs before applying for a moratorium period on your loan. For planned financial needs, choosing affordable borrowing options with manageable EMIs can help reduce future repayment stress.
FAQs
What does a loan moratorium mean in simple terms?
It is a period during which your EMI payments are paused. Lenders provide moratorium periods when it is related to financial hardship.
Does interest continue during the moratorium period?
Yes, the lender will usually continue to accrue interest on the remaining loan balance during the moratorium period.
Will a moratorium affect my credit score?
The moratorium will usually not damage your credit report if your lender reports it to the credit bureaus correctly.
How long does a loan moratorium usually last?
The duration of a moratorium varies depending on the lender, loan type, and applicable policies.
Can I apply for a moratorium period on the loan?
-
Some lenders may allow borrowers to apply for a moratorium on personal loans during periods of financial hardship, subject to eligibility and approval.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply