Moratorium Period

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

May 28, 2023 • 2257 views

Sometimes, borrowers may face difficulties in repaying their loans during times of financial distress or unforeseen circumstances. To provide relief and flexibility, financial institutions offer a moratorium period. In this blog post, we will explore what a moratorium period is in loans, how it works, and how borrowers can apply for it. Understanding the concept of a moratorium period can help individuals effectively manage their loan repayments during challenging times.

What is a Moratorium Period?

A moratorium period, also known as a repayment holiday or deferment period, is a specific duration during which borrowers can temporarily suspend or reduce their loan repayments. It is a grace period granted by lenders, allowing borrowers to alleviate their financial burden for a certain period. During the moratorium period, borrowers are not required to make regular loan payments, and no late payment penalties or default charges are levied.

How Does Moratorium Period Work in Loan?

The purpose of a moratorium period is to provide borrowers with financial relief during challenging times, such as job loss, economic downturns, or personal emergencies.

Temporary Suspension of Repayments

During the moratorium period, borrowers are not obligated to make their regular loan repayments. This means they can temporarily pause their monthly instalments without facing late payment penalties or default charges.

Accrual of Interest

While borrowers may not be making repayments, the loan interest continues to accrue on the outstanding loan balance. The interest accrued during the moratorium period may be added to the outstanding loan balance or recalculated based on the revised repayment schedule.

Extended Loan Tenure

The moratorium period typically extends the loan tenure by the duration of the grace period. For example, if a six-month loan moratorium is granted on a five-year tenure, the loan term would be extended to five years and six months. This ensures that borrowers have sufficient time to repay their loans, considering the temporary suspension of repayments.

How is Interest Rate Calculated in Moratorium Period

Interest calculation during the moratorium period varies depending on the loan type and the lender's terms. Let's explore common methods:

Simple Interest

Interest is calculated only on the outstanding principal amount using the formula: Interest = (Principal) x (Interest rate) x (Time period). Borrowers may pay accrued interest or have it added to the principal, recalculating the repayment schedule after the moratorium ends.

Compound Interest

Lenders may use this method, where interest is calculated on the principal and previously accrued interest. The frequency of compounding varies. The formula is: A = P (1 + r/n)^(nt). Compound interest continues to accumulate during the moratorium.

Revised Repayment Schedule

Lenders may offer a new repayment plan after the moratorium, accounting for accrued interest. The schedule may extend the loan tenure or adjust monthly instalments.

Borrowers should carefully review their lender's terms regarding interest calculation during the loan moratorium and seek clarification if needed.

Is Moratorium Period Beneficial for Borrowers?

The moratorium period's impact on borrowers depends on their financial circumstances. Consider the following factors:

Immediate Relief

The moratorium offers temporary 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.

Increased Interest

Interest continues to accumulate during the moratorium, potentially increasing the total interest paid over the loan tenure.

Extended Tenure

The grace period extends the loan duration, affecting long-term financial planning.

Borrowers must evaluate their situation, weigh the consequences of the moratorium, and assess their ability to resume regular repayments afterward.

How to Avail Moratorium Period?

1.    Contact the Lender

  • Reach out to your lending institution to inquire about their moratorium policy and application process.
  • Visit the official website or call the customer service helpline for information and guidance.

2.    Gather Required Documents

  • Prepare the necessary documents, including loan account details, identification proof, and any other documents specified by the lender.

3.    Submit the Application

  • Follow the lender's prescribed procedure to submit your moratorium application.
  • Some lenders may require you to fill out an online form, while others may require a physical application.

4.    Await Confirmation

  • After submitting the application, wait for the lender's confirmation.
  • The lender will inform you of the outcome of your moratorium request and provide details regarding the revised repayment schedule, if applicable.

5.    Understand the Terms

  • Remember to carefully review the lender’s terms and conditions.
  • Ensure you understand the implications of opting for a moratorium period, including any interest charges or changes to the loan tenure.

Conclusion

In conclusion, a moratorium period provides borrowers with temporary relief by allowing them to defer or reduce loan repayments during challenging times. By understanding the concept of a moratorium period and following the appropriate steps to apply for it, borrowers can alleviate financial stress and manage their loan obligations effectively.

FAQs

1. How many months is a moratorium period?

The moratorium period typically lasts for a few months. However, the specific duration can vary depending on the terms and policies of the lending institution.

2. Is the moratorium period good or bad?

The moratorium period depends on the individual's circumstances. It provides temporary relief by allowing borrowers to pause or reduce their loan repayments during times of financial hardship. However, it can also result in the accrual of additional interest or an extended loan tenure, leading to higher overall repayment costs. So, remember to weigh your options before making the final decision.

3. What is moratorium status?

Moratorium status refers to the condition or classification of a loan or debt during the moratorium period. It signifies that the borrower has been granted the option to defer or reduce their loan repayments for a specific period, as agreed upon with the lender.

4. What happens in the moratorium period?

During the moratorium period, borrowers have the flexibility to temporarily suspend or reduce their loan repayments. This can help alleviate financial stress or provide breathing space to individuals facing economic challenges. 

5. Is moratorium mandatory?

The moratorium period is not mandatory for all borrowers. It is typically offered by financial institutions as an option or relief measure during extraordinary circumstances, such as economic crises or natural disasters. Borrowers can choose to avail themselves of the moratorium if they meet the eligibility criteria and prefer to defer or reduce their loan repayments temporarily. However, it is important to note that opting for the moratorium can affect the overall loan terms and repayment costs.

Disclaimer

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

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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