What is Moratorium Period for Loans and How to Apply for it?

A moratorium is a temporary suspension of loan payments granted by lenders to borrowers during times of financial hardship. It is the prerogative of the RBI to enable and permit the lender to offer a moratorium period to borrowers. It provides relief by allowing borrowers or debtors to defer EMI payments without incurring late fees.

The moratorium period provides more than just financial relief. Besides providing breathing space to manage finances, it also ensures that your credit rating doesn't take a hit and you don't have to pay penalties for deferred payments. In this blog, we will explore what a moratorium period is in loans, how it works, and how borrowers can apply for it.

Moratorium Period Meaning

A moratorium period, also known as a repayment holiday or deferment period, is a short-term suspension or reduction in loan repayments offered by lenders during times of financial trouble. During this holiday period, borrowers have no obligation to make monthly payments and are exempt from late payment penalties or default fines.

The interest on your loan, however, continues, potentially increasing the total loan cost. Unless regulated by the RBI, lenders do not approve a moratorium. As a borrower, you must apply for it to ease loan payments.

The Reserve Bank of India (RBI) permits the extension of moratorium periods under specific circumstances. It includes a national crisis, pandemic, or famine.

While it rarely affects your credit score, it may influence how potential lenders perceive your creditworthiness. Moratoriums differ from grace periods and are commonly included in loan agreements, particularly for education loans or construction loans.

How Does a Loan Moratorium Period Work?

Before you apply, understand how the moratorium works:

Application and Eligibility

No lender offers a moratorium period by default. If you are struggling financially or can't pay EMI temporarily, you first apply for the moratorium. Lenders then approve the request based on your financial situation, type of loan, and the lender's internal policy. Lenders may want verification of the financial difficulties you are facing, such as job loss letters, medical reports, or business loss statements.

Temporary Suspension of EMI Payments, Not the Loan Itself

The lender then approves the temporary suspension of EMI payments. During the moratorium period, you are not obligated to pay EMIs, but this does not mean the loan is completely suspended. The loan and its interest accumulation continue to exist. It only offers you the breathing space without being classified as a defaulter.

Interest Accumulation: The Hidden Cost of Relief

While you are not making monthly payments, interest keeps accumulating on the outstanding principal. The accrued interest is either added to the principal, raising future EMIs, or paid in one large payment later, depending on the lender's policy. This means that your total repayment load increases, making it critical to use moratoriums wisely.

Post-moratorium Repayment

The loan repayment resumes when the moratorium period ends. Lenders often provide two options: increasing your amount of monthly repayments to recover missing payments or extending your loan time period to mitigate the negative impact.

Some lenders may even allow for a step-up repayment plan after the moratorium. A step-up repayment plan is a loan repayment structure where your EMI starts low and gradually increases over time. This structure is typically granted after a moratorium period, when borrowers might initially struggle with full payments but expect their income to rise in the future.

Impact on Credit Score: Not Always Negative

If the lender officially grants the moratorium and correctly reports it to credit bureaus, it will often not affect your credit score. However, it may appear on your credit history and indicate financial stress to future lenders, perhaps affecting your ability to obtain new loans or credit cards.

How is the Interest Rate Calculated in the Moratorium Period?

Interest calculation during the moratorium period varies depending on the loan type and the lender's terms. Here are the most commonly used methods:

Simple Interest

Interest is calculated only on the outstanding principal amount using the formula:

Interest = (Principal) x (Interest rate) x (Period).

Borrowers may pay accrued interest or have it added to the principal, recalculating the repayment schedule after the moratorium ends. This method is commonly used in educational and personal loans.

Compound Interest

Lenders may also use compound interest, which calculates interest on both the principal and any previously accumulated interest. The frequency of compounding (monthly, quarterly) varies by lender. The formula for compound interest is:

A = P × (1 + r/n)^(nt)

Where,

• A is the total amount

• P is the principal

• r is the yearly interest rate

• n is the number of compounding periods per year

• t is the time in years.

Compound interest accumulates throughout the moratorium, increasing the final due amount.

Partial Interest Servicing

During the moratorium, some lenders provide a partial interest option, in which the borrower only pays the interest component of the outstanding loan balance. This technique helps to manage financial burdens during times of temporary hardship while keeping the overall loan payback plan on track.

The principal amount is unaffected throughout this period, and repayment begins once the moratorium expires. This strategy is often used for home loans under construction and some business loans.

Bullet Repayment Structure

Many lenders also provide a bullet repayment plan during the loan moratorium period, in which the borrower does not need to pay any EMIs or interest. Instead, at the end of the tenure or moratorium, the full outstanding loan amount, including principal and accrued interest, is paid in one big sum. 

This strategy is widely utilised in short-term loans and startup finance, where immediate cash flow takes precedence over regular repayments.

Benefits of the Moratorium Period

The moratorium period's impact on borrowers depends on their financial circumstances. Nonetheless, here are the key benefits of the moratorium period you must know:

• Immediate Relief: The moratorium offers temporary relief or respite by allowing borrowers to suspend or reduce loan repayments during financial difficulties.

• Flexibility: It provides breathing space to allocate funds for other critical expenses or build a financial cushion.

• Extended Tenure: Extended tenure relieves financial stress by spreading repayments over a longer period, making EMIs easier to manage after the moratorium.

• Protects Credit Score: It helps you maintain and protect your credit score by preventing reductions that can occur due to late or missed payments.

• Mental and Emotional Relief: Beyond the financial benefit, the moratorium offers peace of mind during stressful times like medical emergencies or job loss, reducing emotional pressure from unpaid dues.

How to Avail the Moratorium Period?

Here's a step-by-step process you can follow to avail of a moratorium period:

1. Check Eligibility in Your Loan Terms

• Contact your lending institution to inquire about their moratorium policy and application process. 

• You must request the moratorium by providing your consent and credible proof of financial problems.

• The moratorium period offered can be extended for up to 6 months, or as permitted by regulatory rules set by the Reserve Bank of India.

• During this period, interest continues to accrue, resulting in a revised schedule of repayment with either higher EMIs or a longer loan term.

2. Submit a Formal Request and Supporting Documents

Submit the moratorium request with the necessary documents:

• Salary slips or termination letters

• Medical certificates

• Bank statements indicating income disruption

3. Wait for Review and Understand Revised Terms

After applying, wait for the lender's confirmation. If accepted, you will be offered the new loan terms, which include:

• Details about accumulated interest

• Extended tenure or an altered EMI schedule

• New repayment start date

4. Provide Consent and Keep Records

Once you have agreed to the amended terms, confirm in writing or digitally. Maintain all communications, amended repayment schedules, and make sure your credit report shows "moratorium approved" (not a default).

Moratorium Period vs Grace Period

While they both sound similar, there are many differences between a moratorium and vs. grace period.

Aspect	Moratorium Period	Grace Period
Definition	Temporary pause on loan payments	Extra time after the due date to repay the loan without penalty
Purpose	Financial relief during hardship	Avoid penalties for minor delays
Interest	Continue to accrue	Interest continues as usual
Duration	3-12 months	Usually 15-30 days
Impact on Loan	No default	No penalty

 

To Conclude

A loan moratorium period provides borrowers with much-needed relief by allowing them to pause loan repayments during times of financial hardship. Borrowers can reduce financial stress and stay on track with their long-term loan commitments by knowing how it works and taking the appropriate steps. Before applying, you must consider both the benefits and disadvantages to make an informed decision.

Frequently Asked Questions

What is the maximum duration of a moratorium period?

The moratorium period typically lasts between 3 to 12 months. However, the specific duration can vary depending on the lender's terms and policies.

Is the moratorium period good or bad?

The moratorium period provides short-term relief by allowing you to pause or reduce your loan repayments during times of hardship. However, it can also result in the accrual of additional interest or an extended loan tenure, leading to higher overall repayment costs.

What is a moratorium status?

Moratorium status is the current status of a debt during an approved moratorium term. It shows that the lender has officially allowed the borrower to defer or lower loan repayments for a set period due to financial hardships or regulatory requirements.

Is a moratorium mandatory?

The moratorium period is not mandatory for all borrowers. Financial institutions typically offer it as an option or relief measure during extraordinary circumstances, such as economic crises.

Will a moratorium affect my future loan eligibility?

While requesting a moratorium has no direct influence on your credit score if authorised by the lender, it may indicate financial distress to future lenders. This may impact their choice when determining your trustworthiness for future loans or credit cards.

How can a moratorium period help with a home loan?

A home loan moratorium period can provide financial relief for borrowers facing delays in construction projects.