Understanding the Concept of Moratorium Period in Personal Loans- Kotak Bank

05 JUNE, 2020

The sudden outbreak of COVID 19 pandemic has made economic stability, a daunting challenge. With the continuing extension of the pandemic lockdown, the ordinary lives of people are disrupted, creating stress on their financial health. To help people with handling the impact created by the pandemic, the Reserve Bank of India has issued a provision to provide a three-month moratorium on repayment of loans. 

Though the move may create relief for the borrowers of loans and credit card users, it is important to be aware that this is not a waiver of the loan. The relaxation is applicable for a specific period, and the banks may charge the interest, at the initially contracted rate.
 

What is a Moratorium Period?

A Moratorium period is a small grace period during the loan tenure, where the borrower need not pay any EMI instalments. It can also be referred to as a waiting period before the loan EMI repayment resumes. In normal cases, you start paying your EMI from the next month after the loan disbursed, till the last month of the tenure. But, when you are in a moratorium period, you need not pay the EMI for that specific period. The prime motive of this period is to ensure that the borrower gets time to be financially sound to repay the loan. 

Impact of Moratorium Period on Personal Loans?

Though the moratorium period is more accessible for educational and home loans, RBI has allowed the banks to grant an EMI pause for most of the loans owing to the COVID situation. If you opt for the moratorium period in personal loans, you can avoid the cash crunch for a short period. But the interest will remain the same, and the gap in payment can give you the burden of extra EMI's. This interest will get added to the further EMI payments, and gradually, you will end up paying more interest. 

The moratorium scheme is mainly opted during short-term financial urgencies. It has its benefits and drawbacks:

  • The moratorium comes as a relief in times of financial crunch. The time gap offered helps you to plan accordingly on the repayment of funds.
  • The credit score of the borrower won't be affected as the lenders will not consider it as default.
  • Since the interest is still payable during the period, the EMI amount might increase after the grace period.
  • Postponing the EMI could extend the loan tenure.


Should You Opt for a Moratorium?

Whether to opt for a moratorium or not is a decision that must be driven by your personal financial standing. If you are among the people who are facing an income uncertainty due to the lockdown, choosing for a moratorium could be the right choice. Be informed that it is just a temporary suspension of EMI payments. Banks will still charge an interest. There won't be any exception or change in the terms and conditions of loan agreements. Hence, check with your lender to understand all about the terms and conditions of the moratorium period before making a decision.

 Additional Read: Tips to manage your Personal Loan EMI payments.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.