What Is Moratorium Period In Personal Loan?

A moratorium enables borrowers to delay interest & principal payments. Read on to know everything about what is moratorium period in personal loan?

4 Nov,2022 11:54 IST 3 views
What Is Moratorium Period In Personal Loan?

A personal loan can bail people out of many a sticky situation, from unforeseen healthcare expenses to urgent home repairs. It can also help people meet lifestyle goals such as buying the latest gadgets or holidaying abroad.

Like all loans, a personal loan also needs to be paid back to the lender with interest and as per the agreed repayment schedule. But what if the borrower faces another crisis during the repayment period and is unable to meet the debt obligations? To deal with such situations, borrowers can request their lenders to provide a moratorium period.

Loan Moratorium

A loan moratorium is a period during the loan tenor when the borrower does not have to pay equated monthly installments (EMI) on the debt. Some loans like education loans have a moratorium period built into it, as repayments usually start a few months after the course is completed or the beneficiary gets a job.

During period of widespread financial emergencies, the government or the Reserve Bank of India can announce a moratorium for a limited period as a relief measure.

For instance, following the national lockdown for COVID-19, the RBI had allowed lenders to provide their borrowers a six-month moratorium on payment of installments on term loans including retail loans.

At the time, most lenders had offered a moratorium to personal loan borrowers, too. However, for personal emergencies in general, borrowers can reach out to their respective lenders directly to avail this facility.

Loans On Which Moratorium Is Allowed

Banks and financial institutions usually allow moratorium on educational, housing and farm loans. This is because many borrowers are not in a position to start paying the EMI in the initial period of the loan.

For instance, most education loans have a moratorium period as students will not be able to repay the loan until they get a job. Similarly, there are some home loans where EMI will start only after the borrower gets possession of the house. This is aimed at helping the homebuyers so that they don't have to pay EMI as well as the house rent.

Personal loans do not have any in-built moratorium, so this is decided on a case-by-case basis. Borrowers can request their lenders for a moratorium on payments if they are facing any difficulties, and lenders can offer this facility to the borrowers at their discretion.

Paying EMI During Moratorium

The borrowers have the freedom to not take the moratorium. It is always better to pay the EMI if the borrower has the means to do it as the moratorium comes at a cost. This is because the loan keeps accruing interest during the moratorium, so effectively the borrower will have to pay interest on interest for this period.

Conclusion

A moratorium provides relief to borrowers in times of financial emergency. It allows borrowers to postpone repayment of interest and principal without being categorised as a default. This gives breathing space to personal loan borrowers and time to sort out their finances.

However, moratorium is not a waiver of the loan but just a postponement of repayment for a limited period. Interest accrued during the moratorium period gets added to the loan. This increases both the interest burden and the period of the loan.

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